Debt Policy at Ust

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Debt Policy at UST
The primary business risk facing UST in 1998 was that the U.S. tobacco industry itself was facing an uncertain future characterized by legal challenges, declining volumes, marketing restrictions, increased taxes, heavy discounting and consolidation. The U.S. smokeless tobacco industry also was transitioning away from the Premium Market and growing through the Price Value Market at a rate of 9%.
Bondholders face very little investment risk given UST’s high interest coverage ratio and substantial cash flows, making UST less susceptible to the risk of bankruptcy. One would be concerned about the industry’s decline and the fact that growth is driven primarily by the Price Value Market. UST is positioned as the Premium Market leader, but owns just 6% of the Price Value Market. Of UST’s total portfolio of products, approximately 1% of the company’s 1998 tobacco sales revenue was derived from the Price Value Market. UST is facing aggressive pricing, heavy competition from new products and they are losing market share in their core operations. Their growth and pricing strategy was to introduce similar products rather than to cut prices. Further concerns are that UST has no plans to expand internationally, and both the CFO and President resigned in February 1997 due to “philosophical differences about the strategic direction of the company.” UST was facing growing threats of changes in legislation that could adversely affect the industry and faced several potential lawsuits if future research proves liability and links smokeless tobacco to cancer. This could jeopardize the future of the entire industry and severely reduce cash flows that would hinder the company’s ability to make interest payments. In addition, there was an outstanding antitrust case that was brought by UST’s second largest competitor, Conwood Co. Litigation was expected to…...

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