Fitch Rates Fortune Brands' $400MM Senior Notes 'BBB-'

Fitch Ratings has rated Fortune Brands' $400 million two-and-a-half-year senior notes 'BBB-'. Proceeds are expected to be used to repay an outstanding $400 million bank term loan.

Fitch currently rates Fortune Brands, Inc. (NYSE: FO) as follows:

--Issuer Default Rating (IDR) 'BBB-';

--Short-term IDR 'F3';

--Commercial paper 'F3';

--Revolving credit facilities 'BBB-';

--Term loan 'BBB-';

--Senior unsecured notes and debentures 'BBB-'.

Approximately $4.5 billion of debt is outstanding. The Rating Outlook is Negative.

The Negative Outlook reflects challenging global economic conditions and the potential for credit metrics to remain weak for a prolonged time despite the expectation that debt will be reduced over the next couple of years. Key to any further rating action will be the ability of the spirits operations to offset weakness in other segments, particularly home and hardware, and the company's ability to sustain reasonable cash flow generation.

FO produces discretionary consumer products within the spirits, home and hardware and golf sectors. The company has experienced revenue declines for the past seven quarters driven by a weak performance in its home and hardware segment. Fitch believes that sales will see less of a decline beginning in the fourth quarter of 2009 (4Q'09), primarily due to a weak performance in 4Q'08, and show some improvement in 2010 with the potential for modest gains in the housing market.

Fitch expects FO's operating earnings to remain weak in 2009 and still be challenged in 2010. It is unlikely that there will be a strong turnaround in domestic housing or repair/remodeling activity in 2010, which will maintain pressure on the home and hardware segment. Spirits have generally held up and will be the main driver of earnings going forward. Golf has suffered from deteriorating discretionary consumer spending affecting purchases of more expensive items, particularly golf clubs. With consumer spending expected to remain constrained, only limited improvement for the golf sector is expected in 2010.

The company also continues to restructure its businesses to align cost structures with industry conditions. Efforts include: transitioning to a new international sales and distribution alliance with Edrington Group while strengthening its wholly-owned sales organization in the U.S. within its spirits operations; significantly reducing manufacturing footprint and employee count in home and hardware; and reducing its cost structure in golf. FO has a fair amount of operating leverage in its home and hardware segment and any improvement in the segment's top line should show quickly in operating income.

Free cash flow (cash flow from operations less capital expenditures and dividends) of $400 million is projected for 2009 which will be used to reduce debt or build cash. There are no debt maturities until January 2011 when $750 million comes due. In addition, FO has taken several crucial steps to increase liquidity until the economy recovers. These include:

--$500 million of debt issued June 12, 2009 maturing in 2014, which enhanced liquidity, reduced short-term debt and has resulted in $260 million of cash at Sept. 30, 2009;

--Use of cash balances and free cash flow to repay bank revolving debt;

--A committed facility in the amount of $2 billion, which matures in October 2010, is expected to be renewed or extended successfully;

--A dividend cut of 57% which will improve free cash flow by $110 million in 2009 and approximately $150 million thereafter.

FO's leverage (total debt/EBITDA) climbed to 4.5 times (x) for the 12 months ended Sept. 30, 2009 from 3.6x at year-end 2008. EBITDA/interest amounted to 5.5x in 2008 and was 4.5x for the latest 12 months. Credit measures are not expected to worsen meaningfully from current levels for the remainder of 2009. Some improvement in these measures is anticipated in 2010 and significantly stronger metrics are anticipated for 2011. Fitch expects a considerable recovery in financial posture by the beginning of 2011, when it is expected that most, if not all, of a maturing $750 million maturing note will be repaid through a build up of cash balances.

Additional information is available at 'www.fitchratings.com'.

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