August 2026: S&P Global Assigns ‘BBB-‘ Rating to BAT’s Perpetual Subordinated Hybrid Instruments
S&P Global Ratings has assigned a ‘BBB-‘ long-term issue rating to British American Tobacco PLC’s proposed multi-tranche perpetual subordinated fixed-to-reset rate hybrid securities. The rating covers the hybrid segment of BAT’s multi-part capital market offering, which also includes $1.5 billion in senior debt divided into $750 million of 5.30% notes due 2033 and $750 million of 5.55% notes due 2036.
The new hybrid securities feature a two-tranche benchmark structure with 5.25-year non-call and 8-year non-call periods. S&P set the ‘BBB-‘ issue rating two notches below BAT’s ‘BBB+’ long-term issuer credit rating. The two-notch deduction accounts for a one-notch reduction due to subordination, as the notes rank junior to senior debt, and a one-notch reduction for payment deferral risk, reflecting BAT’s discretionary option to defer coupon payments without causing a default.
S&P assigned intermediate equity content to both hybrid tranches until their first reset dates in January 2031 for the 5.25-year tranche and October 2033 for the 8-year tranche. Under this treatment, S&P views 50% of the principal as equity rather than debt, treating 50% of coupon payments similarly to dividend distributions in its credit metrics. The intermediate equity designation will drop to zero following the first reset dates as the residual effective maturity falls below 20 years.
Net proceeds from the hybrid issuance are slated to finance a tender offer for BAT’s existing 1 billion euro 3% perpetual subordinated notes ahead of their first call date in September 2026. Consequently, S&P removed equity credit from the legacy 3% issue while maintaining intermediate equity content for BAT’s separate 1 billion euro 3.75% perpetual notes, which face a first call in December 2029.
S&P affirmed BAT’s long-term issuer credit rating at ‘BBB+’ with a stable outlook. The agency indicated that following the transaction, BAT’s hybrid debt will remain well below its 15% maximum capitalization threshold, allowing the company to optimize its capital structure and maintain balance sheet flexibility.
March 2026: Fitch Upgrades British American Tobacco (BAT)’s credit rating to “A-“
Fitch Ratings has upgraded British American Tobacco’s (BAT) Long-Term Issuer Default Rating (IDR) to “A-” from “BBB+”. The Rating Outlook is Stable. Fitch has also removed BAT’s ratings from Under Criteria Observation (UCO). Fitch had placed BAT’s ratings on UCO following the publication of its Corporate Rating Criteria in January 2026. The upgrade reflects BAT’s strong business profile as one of the largest global tobacco companies with wide regional and brand diversification, healthy growth potential from next-generation products (NGP) and ability to generate consistently strong profitability and cash flows, alongside a conservative financial policy.
Key Rating Drivers
– Strong Business Model, Healthy Profitability: The upgrade follows the assessment of BAT’s strong operating profile with superior scale, anchored in a widely diversified portfolio across product categories, brands and geographies. These operating strengths translate into projected annual post-dividend free cash flow (FCF) of £1.8 billion-2.4 billion for 2026-2028, supported by low- to mid-single-digit organic revenue growth. FCF and revenue growth in 2025 were weak, as anticipated, due to the impact of excise tax increases in Bangladesh and Australia and a decline in vaping revenue. Fitch expects EBITDA margin to improve to 48% by 2028 (2025: 47%), aided by new product categories with anticipated double-digit growth, and further efficiency savings in 2026-2030.
– NGP Profitability Aids Credit Profile: BAT is an industry leader in NGP, spanning vaping, heated tobacco products, and oral products under a global brand architecture. NGP organic revenue grew 7% in 2025, driven by a 48% increase in modern oral products, which more than offset an 8.6% decline in vapour. BAT’s NGP made its first positive operating contribution in 2023, which increased to £442 million in 2025 on a constant currency basis, up nearly 80% from 2024. BAT’s ability to expand its NGP footprint and achieve profitability gains is positive for the rating.
– Appropriate Financial Policy: BAT’s net leverage target of 2.0x-2.5x from 2026, based on the company’s adjusted metrics excluding Canada’s contribution and broadly aligned to Fitch’s calculation, supports the “A-” rating. The adherence to a conservative financial policy has been reinforced by BAT’s public commitment to maintain its leverage target, following an upward adjustment for the settlement plan under the Canadian lawsuit resolution, now in effect. Fitch-adjusted EBITDA net leverage was 2.6x (after a 50% equity credit to hybrids) in 2025 and it will decrease to 2.5x and 2.3x by end-2026 and end-2027, respectively.
– Repositioning in Challenging Vapour: BAT holds a leading position in its top seven vapour markets, with a 52% share in the US. BAT’s vapour volume further declined 13% in 2025 due to the lack of enforcement against illegal products in Canada and the US and temporary disruption in Europe with single-use vape bans implementation and increased taxation in Poland and France. Some positive momentum could be expected as the US is showing signs of stabilisation following an increase in law enforcement and due to BAT’s strategy of focusing on premium vapour and market rationalisation. Regulatory risk is generally increasing but greater enforcement in the US could be materially beneficial to BAT.
– US Combustible Turnaround: The US combustible organic growth was positive in 2025 for the first time in three years, as volume decline slowed to 7%-8% from 10%-15% in previous years and a well-executed pricing strategy more than offset the volume decrease. At this normalised volume decline, BAT will be able to keep their US combustible mildly positive. Overall stable profitability in the US combustible segment and increased NGP profitability, driven by continued robust nicotine pouch revenue growth, will drive margin improvement and deleveraging despite its continued share buyback commitment.
– Share Buyback Commitment: Strong FCF generation will allow BAT to continue buying back shares from 2027, after completing its announced £1.3 billion buybacks for 2026 and committing to maintaining sustainable share buyback programmes. Fitch assumes potential share buybacks of £3.2 billion over 2027-2028. The company follows an annual dynamic capital allocation strategy and any potential shareholder distributions is unliekly to compromise its public leverage target.
– Decent Execution Capabilities: BAT is one of the companies in the sector most capable of coping with regulatory risks due to its developed innovation, marketing and research platforms. The rating has largely factored in general risks from potential changes to excise duties, marketing practices, and greater regulatory involvement. The industry’s strict and developing regulatory environment remains an event risk.
Peer Analysis
BAT (A-/Stable) is one of the largest tobacco companies globally, holding a number two position in the US by revenue, behind Altria Group (BBB+/Stable) and internationally, behind Philip Morris International (PMI, A/Stable). BAT is rated lower than PMI due to its less diversified net revenue. BAT’s smokeless revenue portfolio contribution to net sales reached 18% in 2025, much lower than PMI’s 42%. The company had similar leverage at about 2.6x in 2025, although Fitch anticipates PMI’s leverage to return to 2x from 2026 while BAT’s deleveraging is likely to moderate to 2.5x, further supporting the difference in ratings.
BAT’s IDR is one notch higher than Altria’s, due mainly to the latter’s sole concentration on the US and exposure to the regulatory environment and enforcement challenges in this market. Imperial Brands (BBB/Stable) has weaker competitive positioning and more limited diversification than BAT but has a stronger focus on developed markets and lower-priced and mid-range products, alongside a slower foray into NGP. This explains BAT’s higher rating.
Fitch’s Key Rating-Case Assumptions
– Organic revenue growth: 3%- 4% over 2026-2029
– EBITDA margin: trending toward 48% by 2028
– Deconsolidation of 85% of the Canadian operations, to reflect the litigation settlement plan, which requires remittance of 85% of net income after tax generated by the Canadian operations over the next five years. All cash from the Canadian operations is restricted
– M&A spending on bolt-on acquisitions and partnerships at £100 million a year over 2026-2029
– Capex: Stable at 2.9% of sales to 2029
– Dividend per share: growing at 2%-3% a year
– Announced share buybacks of £1.3 billion in 2026, followed by assumed £1.5 billion in 2027 and £1.7 billion in 2028No adjustments made to the SCP, resulting in an IDR of ‘A-‘.
Rating Sensitivities
– Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade: Material loss of market share or an inability to achieve profitability for NGP as combustible volumes decline and competition for NGP intensifies, resulting in lower profits and leading to the FCF margin declining towards the low-single digits; EBITDA net leverage above 2.5x on a sustained basis; Operating EBITDA interest coverage consistently below 7x
– Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade: Good progress towards the target of increased NGP revenue contribution leading to sustained above-industry-average organic revenue and EBITDA growth; EBITDA net leverage under 2.0x on a sustained basis; Maintaining the FCF margin in the mid-to-high single digits; Operating EBITDA interest coverage above 8x
Liquidity and Debt Structure
Fitch assesses BAT’s liquidity as strong, with a balanced maturity profile, projected cash balance at about £3.1 billion in 2026, positive FCF and a renewed £5 billion committed revolving credit facility (RCF) comprising two main tranches, maturing in 2026 and 2030 (both with extension options). BAT also has access to a £25 billion Euro medium term note programme, $4 billion US and £3 billion European commercial paper programmes and short-term bilateral facilities of £2.7 billion maturing from March 2026 through December 2026. As of end-2025, the RCF and bilateral facilities were undrawn.
March 2025: Fitch affirms British American Tobacco (BAT)’s credit rating at “BBB+/Stable”
Fitch Ratings affirmed British American Tobacco (BAT)’s long-term Issuer Default Rating (IDR) and senior unsecured ratings at “BBB+” with outlook Stable. BAT’s perpetual subordinated notes rating is “BBB-“.
The ratings reflect BAT’s strong business profile as one of the largest global tobacco companies in a fairly consolidated sector, with wide regional and brand diversification. Fitch views positively BAT’s broad next-generation products (NGP) portfolio and exposure to a wide range of mature, cash-generating and emerging markets offering good growth potential. The credit profile remains supported by BAT’s conservative financial policy with a commitment to a target leverage range, which provides good headroom under the “‘BBB+” rating.
Key Rating Drivers
– Neutral Impact from Canadian Lawsuit: Fitch expects the proposed resolution of tobacco product-related claims and litigation in Canada to have a limited effect on adjusted credit metrics for BAT. Settlement payments will come solely from operations in the country, which are currently excluded from the Fitch analysis. Fitch observes good progress toward implementing the plan, which was approved by the court-sanctioned mediator in March 2025. The plan suggests an upfront contribution using cash currently restricted at the Canadian subsidiary, as well as payments from the Canadian entities’ profits, excluding non-combustible operations, until the aggregate settlement amount is paid.
– Financial Policy Supports Rating: BAT’s target net leverage range of 2.0x-2.5x, based on the company’s adjusted metrics, provides comfortable headroom at the “BBB+” rating. The commitment to a conservative financial policy has been reinforced by BAT’s intention to operate within this range even excluding Canadian operations by end-2026. Fitch-adjusted EBITDA net leverage was at 2.7x (after giving 50% equity credit to hybrids) in 2024 and Fitch projects it to decrease to 2.5x by 2026.
– Strong Cash Generation: Fitch’s rating case projects annual post-dividend free cash flow (FC) to remain strong at £1.8 billion to £2.2 billion from 2026 to 2028, supported by low to mid-single-digit organic revenue growth. Fitch anticipates 2025 FCF and revenue growth will temporarily be weaker due to the impact of excise tax increases in Bangladesh and Australia and temporary disruptions in France and the UK following the single-use vape ban. Fitch expects EBITDA margin to improve to 48% by 2027 (2024: 47%), aided by new product categories with anticipated double-digit growth, and further efficiency savings in 2025-2027.
– Share Buybacks to Continue: Fitch expects strong FCF generation will allow BAT to continue buying back shares from 2026, after completing announced £0.9 billion buybacks for 2025. Fitch’s rating case assumes potential share buybacks of up to £3.5 billion over 2026-2027. Fitch acknowledges the company follows an annual dynamic capital allocation strategy and expect any potential shareholder distributions will not compromise the stated leverage targets.
– NGP Profitability Aids Credit Profile: Fitch assesses BAT’s NGP business as industry-leading, spanning vaping, heated tobacco products, and oral products under a global brand architecture. BAT’s NGP segment organic revenue grew by 9% in 2024, driven by over 50% modern oral revenue growth. The Group achieved a positive operating contribution in the NGP segment in 2023 and increased new category contribution by £251 million in 2024 on a constant currency basis. Fitch views BAT’s ability to expand its NGP footprint and achieve profitability gains as positive for the rating.
– Leading Position in Challenging E-vapour: BAT holds a leading position in its top seven vapour markets, with a value share in the US at 50%. BAT’s vapour volume declined 5.9% in 2024 due to the lack of enforcement of illegal single-use vape products in the US, which constrains growth. The lack of enforcement of the flavour ban in Quebec produces similar pressure and Fitch expects temporary disruption in Europe with single-use vape regulations in France and the UK in 2025. E-vapour is BAT’s largest new category across 63 markets. Fitch sees regulatory risk as generally increasing in the segment but notes that higher enforcement, particularly in the US, could be materially beneficial to BAT.
– US Combustible Decline: Fitch expects affordability to remain an issue for US consumers as weakening macro from trade tariff implementation in 2025 will drive further combustible decline. BAT’s US combustible volume declined by 9.6% in 2024 (vs. -11% in 2023) and Fitch expects a high single digit decline in 2025-2026, partially compensated by price increases. Fitch no longer anticipates any medium-term material regulatory impact following withdrawal of the proposed menthol ban. Increased NGP profitability and more robust performance of BAT’s combustible segment in other regions plus cost efficiencies will more than compensate profitability pressure from the US combustible segment.
– Decent Execution Capabilities: BAT is one of the companies in the sector most capable of coping with regulatory risks due to its developed innovation, marketing and research platforms. The general risks from potential changes to excise duties, marketing practices, and greater regulatory involvement are largely assumed in the rating. The industry’s strict and developing regulatory environment remains a source of event risk.
Peer Analysis
BAT is one of the largest tobacco companies globally, holding a number two position in the US by revenue, behind Altria (BBB/Stable) and internationally, behind Philip Morris International (PMI, A/Stable). BAT is rated lower than PMI due to its less diversified net revenues, BAT’s reduced risk products portfolio contribution to net sales reached 13% in 2024, much lower than 39% for PMI. Fitch now projects financial leverage, which was previously a key differentiator between PMI and BAT, to reach a similar level in 2025 at around 2.5x, although PMI’s leverage will return to 2x from 2026, further supporting the difference in ratings. BAT’s IDR is one notch higher than Altria, mainly due to the latter’s higher business risk profile and sole concentration on the US.
Imperial Brands (BBB/Stable) displays weaker competitive positioning and more limited geographic diversification than BAT, with a stronger focus on developed markets and lower-priced and mid-range products, together with a slower foray into NGP. This explains BAT’s higher rating.
Key Assumptions
– Organic revenue growth: at around 1% in 2025, accelerating to over 3% in 2026 and to around 4% in 2027
– EBITDA margin: trending toward 48% by 2027
– Deconsolidation of Canadian operations: reducing operating profits by around 4% and restricting cash of £2.1 billion a year, including cash tied in operations
– M&A spending on bolt-on acquisitions and partnerships: £100 million a year over 2025-2027
– CAPEX: stable at 2.6% of sales to 2027
– Dividends: growing at 3%-5% a year
– Announced share buybacks: £0.9 billion in 2025, followed by hypothetical share buybacks of £1.5 billion in 2026 and £2.0 billion in 2027
Rating Sensitivities
– Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade: Material loss of market share or an inability to achieve profitability for next generation products as combustible volumes decline, competition for NGP intensifies, resulting in lower profits and leading to the FCF margin declining under 4% of sales; EBITDA net leverage above 3.0x on a sustained basis; Operating EBITDA interest coverage below 6.5x
– Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade: Good progress towards NGP category target increased revenue contribution leading to sustained organic revenue and EBITDA growth, EBITDA net leverage towards 2.0x on a sustained basis; Maintaining the FCF margin at around mid-single digits; Operating EBITDA interest coverage above 8x
Liquidy & Debt Structure
Fitch assesses BAT’s liquidity as strong, with a balanced maturity profile, projected cash balances at around £3.3 billion in 2025-2026, positive FCF and a renewed £5.4 billion committed revolving credit facility (RCF) comprising two main tranches, maturing in 2026 and 2027. BAT also has access to a £25 billion Euro Medium Term Note program, US$4 billion and £3 billion European commercial paper programs and short-term bilateral facilities of £2.4 billion maturing from March 2025 through December 2025. As of end-2024, the RCF and bilateral facilities were undrawn. Liquidity was further strengthened in March 2025 by the issuance of US$2.5 billion notes.
October 2024: Fitch sees neutral impact for PMI and BAT from the Canadian Settlement
Fitch states that the proposed resolution of tobacco product-related claims and litigation in Canada will be rating neutral for Philip Morris International (PMI, rating: A/Negative) and British American Tobacco (BAT, rating: BBB+/Stable), while reducing the financial uncertainty related to the litigation1. To read more about the Canadian settlement proposal: Tobacco: Canadian Settlement.
Despite the material aggregate settlement amount, the proposed structure would have little effect on Fitch’s adjusted credit metrics for PMI and BAT as the upfront and annual payments are to be made solely from the Canadian operations. Fitch follows a limited downside risk approach by already assuming no value remaining in the operations in Canada for both companies – in other words, Fitch considers PMI and BAT without the assets and cashflows of Canadian subsidiaries. PMI deconsolidates its Canadian subsidiary following US GAAP methodology, while Fitch makes adjustments to BAT’s financials by removing profits and cash held in Canada from rating considerations.
Fitch anticipates a limited effect on PMI’s and BAT’s EBITDA, leverage or rating upside from potential re-integration of operations in Canada to the financials of the two companies, if the settlement is implemented. This expectation is due to the relatively small size of the remaining profits from the businesses in Canada after settlement payments, including from new generation products.
March 2024: Fitch upgrades BAT’s credit rating to BBB+
Fitch upgrades British American Tobacco (BAT)’s credit rating (long-term issuer and senior unsecured debt) from BBB to BBB+ (perpetual subordinated notes rating: from BB+ to BBB-) while keeping the outlook as Stable and short-term debt rating as F22. Fitch notes that the upgrade reflects BAT’s lowered leverage ratio and drive for further deleveraging as well as the improved profitability and strong free cash flow (FCF) generation.
Rationale for the upgrade
– Financial Policy: BAT’s narrowed target net leverage range of 2x-2.5x (based on BAT’s metrics) allows comfortable headroom at BBB+ (Fitch’s own leverage estimation & expectation: 2.8x at the end of 2023; at / below 2.5x in 2025 and beyond)
– Strong Cash Generation: Fitch estimates annual post-dividends FCF of £1.7-2Bn over the next four years, supported by low single digit organic revenue growth and EBITDA margin improvement towards 49% from 47% in 2023 (- supported by double-digit new category growth and further efficiency savings). Fitch expects share buybacks of up to £3.5Bn over 2026-2027 in addition to announced £1.6Bn buybacks in 2024-2025
– NGP Profitability: Positive operating contribution achieved in 2023, two years earlier than originally anticipated (BAT’s target: 50Mn NGP users by 2030, up from 24Mn in 2023)
– Expectation of (eventual) improvements in the US market: Despite the persistent lower consumer confidence in the US, Fitch expects BAT’s US combustible volume decline to decelerate to high-single digit rates in 2025 (from 11% in 2023). However, especially in 2024, price increases will not be able to fully make up for the volume decline in the US. Nevertheless, Fitch believes that robust performance in other segments (i.e. NGPs) and regions together with further cost efficiencies will more than compensate the profitability pressure from the US combustible segment
– Delayed US regulatory risks: Final approval of the US Menthol ban was delayed and timing in the context of the US election year is uncertain (although it is scheduled for 2024)
– Decent execution capabilities
– Litigation impact well-managed (“limited downside risk”): Fitch assumes no value remaining in ITCAN (Canadian operations) as a result of the litigation and eliminates all cash uncertainties associated with the legal proceedings (resulting in +0.2x leverage increase). This de-consolidation removes a profit contribution of £600Mn (~5% of operating profits) and restricts around £1.9Bn of cash.
Key Assumptions
– Organic annual revenue and profit growth: +2.2% to 2027 (on average)
– EBITDA margin: just above 48% in 2024 and trending toward 49% by 2027
– CAPEX: stable at 2.6% of sales to 2027
– M&A Spending: Bolt-on acquisitions and partnerships at £100Mn a year over 2024-2027
– Dividend growth: 3%-5% a year
– Share buybacks: £1.6Bn over 2024-2025, £1.5Bn in 2026 and £2Bn in 2027.
Catalysts for future rating action
Each or a collection of the following factors could lead to a positive rating action:
– Good progress towards NGP category target (increased revenue contribution leading to sustained organic revenue and EBITDA growth)
– Net debt/EBITDA towards 2.0x on a sustained basis
– Maintaining FCF margin at around mid-single digit
– Operating EBITDA/interest coverage above 8x.
Each or a collection of the following factors could lead to a negative rating action:
– A material impact from the menthol ban in the US
– Lower profits leading to FCF margin declining under 4% of sales (loss of global market share or an inability to maintain NGP profitability as the combustible volumes decline and competition for NGP intensifies)
– Net debt/EBITDA above 3.0x on a sustained basis
– Operating EBITDA/interest coverage below 6.5x.
September 2023: Fitch Ratings issued a Credit Analysis report for the Global Tobacco companies
Fitch Ratings issued a Credit Analysis report for the Global Tobacco companies3: PMI (A/Stable), BAT (BBB/Positive), Altria (BBB/Stable) and Imperial Brands (BBB/Stable). The ratings remain underpinned by strong operational cash flow generation across the industry.
Fitch states that US/UK tobacco companies show solid performance supported by continued good pricing power, along with resilient demand with only moderate volume pressure from weakening consumer purchasing power in some markets. In the medium term. Fitch believes most global tobacco companies to maintain their ability to implement price increases and develop product mixes that compensate for continuous volume declines in the core combustible segment.
Fitch expects smoke-free products – an increasingly material share of revenue for many – to gradually support sector revenue and profit. However, Fitch views the business risk profiles for rated tobacco companies as increasingly differentiated by the development of smoke-free products and notes that the smoke-free products require careful strategic execution to reflect differing and developing consumer tastes and preferences, as well as growing regulatory pressure on non-combustible products in many markets.
Fitch notes that credit rating headroom has improved for PMI with deleveraging on track after its significant Swedish Match acquisition in 2022 and BAT’s deleveraging supports the Positive outlook on the rating.
References:
- https://www.fitchratings.com/research/corporate-finance/fitch-ratings-neutral-impact-for-pmi-bat-from-canadian-lawsuit-proposed-settlement-24-10-2024 ↩︎
- https://www.fitchratings.com/research/corporate-finance/fitch-upgrades-british-american-tobacco-to-bbb-outlook-stable-26-03-2024 ↩︎
- https://www.fitchratings.com/research/corporate-finance/global-tobacco-ratings-gain-headroom-on-solid-profits-capital-allocation-19-09-2023 ↩︎
