Notes to Consolidated Financial Statements
(Continued)
Note 9.
Short-Term Borrowings and Borrowing Arrangements:
At December 31, 2004 and 2003, Altria Group, Inc.’s short-term borrowings and related average interest rates consisted of the following:
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2004 |
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2003 |
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(in millions) |
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Amount
Outstanding |
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Average
Year-End
Rate |
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Amount
Outstanding |
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Average
Year-End
Rate |
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Consumer products: |
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Bank loans |
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$ 878 |
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4.9% |
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$ 915 |
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4.6% |
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Commercial paper |
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1,668 |
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2.4 |
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2,700 |
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1.5 |
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Amount reclassified |
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as long-term debt |
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(1,900 |
) |
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$ 2,546 |
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$ 1,715 |
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The fair values of Altria Group, Inc.’s short-term borrowings at December 31, 2004 and 2003, based upon current market interest rates, approximate the amounts disclosed above.
Following a $10.1 billion judgment on March 21, 2003, against PM USA in the Price litigation, which is discussed in Note 19. Contingencies, the three major credit rating agencies took a series of ratings actions resulting in the lowering of ALG’s short-term and long-term debt ratings. During 2003, Moody’s lowered ALG’s short-term debt rating from “P-1” to “P-3” and its long-term debt rating from “A2” to “Baa2.” Standard & Poor’s lowered ALG’s short-term debt rating from “A-1” to “A-2” and its long-term debt rating from “A–” to “BBB.” Fitch Rating Services lowered ALG’s short-term debt rating from “F-1” to “F-2” and its long-term debt rating from “A” to “BBB.”
While Kraft is not a party to, and has no exposure to, this litigation, its credit ratings were also lowered, but to a lesser degree. As a result of the rating agencies’ actions, borrowing costs for ALG and Kraft have increased. None of ALG’s or Kraft’s debt agreements require accelerated repayment as a result of a decrease in credit ratings.
ALG and Kraft each maintain separate revolving credit facilities that they have historically used to support the issuance of commercial paper. However, as a result of the rating agencies’ actions discussed above, ALG’s and Kraft’s access to the commercial paper market was eliminated in 2003. Subsequently, in April 2003, ALG and Kraft began to borrow against existing credit facilities to repay maturing commercial paper and to fund normal working capital needs. By the end of May 2003, Kraft regained its access to the commercial paper market, and in November 2003, ALG regained limited access to the commercial paper market.
At December 31, 2004, credit lines for ALG and Kraft, and the related activity, were as follows:
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ALG
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Type
(in billions of dollars) |
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Credit Lines |
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Amount
Drawn |
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Commercial
Paper
Outstanding |
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Lines
Available |
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Multi-year |
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$5.0 |
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$ — |
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$ — |
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$5.0 |
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The ALG multi-year revolving credit facility requires the maintenance of an earnings to fixed charges ratio, as defined by the agreement, of 2.5 to 1.0. At December 31, 2004, the ratio was 9.7 to 1.0. The Kraft multi-year revolving credit facility, which is for the sole use of Kraft, requires the maintenance of a minimum net worth of $18.2 billion. At December 31, 2004, Kraft’s net worth was $29.9 billion. ALG and Kraft expect to continue to meet their respective covenants. The multi-year facilities, which both expire in July 2006, enable the respective companies to reclassify short-term debt on a long-term basis.
After a review of projected borrowing requirements, ALG’s management determined that its revolving credit facilities provided liquidity in excess of its needs. As a result, ALG’s 364-day revolving credit facility was not renewed when it expired in July 2004. In July 2004, Kraft replaced its 364-day facility, which was expiring. The new Kraft 364-day revolving credit facility, in the amount of $2.5 billion, expires in July 2005, although it contains a provision allowing Kraft to extend the maturity of outstanding borrowings for up to one additional year. It also requires the maintenance of a minimum net worth of $18.2 billion. These facilities do not include any additional financial tests, any credit rating triggers or any provisions that could require the posting of collateral.
In addition to the above, certain international subsidiaries of ALG and Kraft maintain uncommitted credit lines to meet their respective working capital needs. These credit lines, which amounted to approximately $2.0 billion for ALG subsidiaries (other than Kraft) and approximately $0.6 billion for Kraft subsidiaries, are for the sole use of these international businesses. Borrowings on these lines amounted to approximately $0.9 billion and $0.4 billion at December 31, 2004 and 2003, respectively.
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