OREANDA-NEWS. June 17, 2015. Fitch Ratings has downgraded Lorillard Inc.'s (Lorillard) Issuer Default Rating (IDR) to 'BBB-' from 'BBB' as well as Lorillard Tobacco Co.'s IDR to 'BBB-' from 'BBB'. Fitch has also removed the Negative Rating Watch (originally placed on July 15, 2014) and assigned a Stable Rating Outlook. Subsequently, the ratings for Lorillard and Lorillard Tobacco Co. are withdrawn. The rating actions apply to \\$3.5 billion of outstanding unsecured debt. A full list of rating actions follows at the end of the press release.

KEY RATING DRIVERS
The ratings downgrade reflects the pressure on Lorillard's credit portfolio from its purchase by Reynolds American Inc. (Reynolds American) for approximately \\$24.7 billion on June 12, 2015. Effective today, brand assets and property of Lorillard were divided between Reynolds American and Imperial Tobacco Group (Imperial Tobacco) with Lorillard's best-selling cigarette brand Newport moving under Reynolds American, and other premium and value brands, Winston, Salem, Kent, and Maverick, as well as E-cigarettes blu E-cig and SkyCig flowing to Imperial Tobacco. Imperial Tobacco will also acquire Lorillard's physical assets, including manufacturing facilities. The ratings withdrawal results from the assumption of Lorillard Tobacco Co.'s debt by RJ Reynolds Tobacco Co., a wholly-owned subsidiary of Reynolds American.

KEY ASSUMPTIONS
Key assumptions within Fitch's rating case for Lorillard include:
--Completion of the purchase of Lorillard on June 12, 2015;
--Divestiture of certain Lorillard brands and property to Imperial Tobacco for \\$7.1 billion;
--Assumption of Lorillard Tobacco Co. debt by RJ Reynolds Tobacco Co.;
--Incremental debt to fund the transaction.

RATING SENSITIVITIES
Future developments that may individually or collectively, lead to a negative rating action:

--Rating pressure will arise if unadjusted leverage exceeds 3.5x at the end of 2017;
--A leveraging transaction such as another significant debt financed acquisition or active share repurchasing that impedes leverage reduction to the abovementioned target.

Fitch sees a positive rating action as unlikely over the intermediate term given the presently high gross debt leverage for the rating category.
LIQUIDITY

Liquidity was solid with cash and short-term investments of \\$2.25 billion and operating cash flow of \\$1.47 billion for the latest 12 months as of March 31, 2015. Excess liquidity is important given Lorillard's annual payment in April to the master settlement agreement (MSA) of around \\$1 billion.

FULL LIST OF RATING ACTIONS

Fitch had taken the following rating actions:

Lorillard Inc.
--Long-term IDR downgraded to 'BBB-'from 'BBB';
--Short-term IDR downgraded to 'F3' from 'F2'.

Lorillard Tobacco Co.
--Long-term IDR downgraded to 'BBB-'from 'BBB';
--Short-term IDR downgraded to 'F3' from 'F2';
--Senior unsecured bank credit facility downgraded to 'BBB-' from 'BBB';
--Senior unsecured debt downgraded to 'BBB-' from 'BBB'.

Fitch has removed the ratings from Rating Watch Negative , originally placed on July 15, 2014. The Rating Outlook is Stable. Subsequently, Fitch has withdrawn Lorillard and Lorillard Tobacco Co.'s ratings.