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TEXT-S&P rates Baxter International notes 'A+'
Overview -- Medical products company Baxter International filed a Rule 415 shelf registration and is issuing $750 million of senior unsecured notes. -- We are assigning a preliminary 'A+' rating to the senior unsecured debt securities filed under Baxter's Rule 415 shelf registration. -- At the same time, we are assigning an 'A+' rating to $750 million senior unsecured notes to be issued in two tranches maturing in 2022 and 2024, and affirming all outstanding ratings on the company. -- The stable outlook reflects our view that product diversity should help Baxter absorb setbacks of any one product line, and that it will maintain a modest financial risk profile. Rating Action On Aug. 8, 2012, Standard & Poor's Ratings Services assigned its 'A+' preliminary rating to debt securities filed under Deerfield, Ill.-based Baxter International Inc.'s 415 shelf registration. The filing falls under the SEC's well-known seasoned issuer (WKSI) rules, which do not require a dollar amount of securities to be registered. Each time the company sells securities, it will provide a prospectus supplement that will contain specific information about the terms. We also assigned our 'A+' rating to the company's $750 million drawdown of senior unsecured notes. Proceeds will be used for general corporate purposes. We note that Baxter's capital expenditures will be increasing to fund a new fractionation facility. In addition, we affirmed all our ratings on Baxter International, including our 'A+' corporate credit rating. The rating outlook is stable. Rationale The ratings on Baxter reflect its "strong" business risk profile as a leading manufacturer of diversified and relatively noncyclical medical products, sustained by extensive worldwide operations, solid distribution channels, a very large and entrenched customer base, and low-cost manufacturing. Baxter's "modest" financial risk profile reflects a conservative balance sheet, stable recurring revenues from consumables and disposables, and strong liquidity, despite the significant distribution of cash (via dividends and common stock repurchases) to shareholders. We expect that, over the near term, revenues will grow in the low- to mid-single digits, in line with overall health care industry growth. We believe Baxter can sustain an adjusted EBITDA margin (per our calculation) above 30%, as manufacturing optimization programs, operating leverage, and expanded product offerings offset the impact of health care legislation, global pricing pressures, and costs associated with plant expansions. Debt (adjusted for factored receivables of $160 million, operating leases of $679 million, and unfunded pension liabilities of $1.2 billion) was $7.3 billion as of Dec. 31, 2011. Debt to EBITDA was 1.7x at March 31, 2012, and funds from operations (FFO) to debt was 52%. Strong EBITDA interest coverage of 23x partly reflects Baxter's low cost of capital. We expect debt leverage to remain at about 1.7x over the next two years. Baxter develops, manufacturers, and markets a broad array of products for the treatment of hemophilia, immune disorders, infectious diseases, kidney disease, trauma, and other chronic and acute medical conditions. Its diversity is evidenced by many product categories that operate under its BioScience and Medical Products business segments; no product category contributes more than 18% of total sales. We believe some loss in market share of infusion pump systems, because of the U.S. Food and Drug Administration- (FDA) mandated COLLEAGUE infusion pump replacement, will not be material to results. Baxter has a broad geographic footprint, deriving 59% of 2011 revenues from outside the U.S., including a meaningful presence in emerging markets. It is a leading supplier with strong brand awareness, selling products in more than 100 countries, and manufacturing products in 27 countries; end users are diverse. However, Baxter is exposed to competitive pressures, particularly in markets with commodity-like characteristics, such as plasma, and/or where generic alternatives are available. Thus, in addition to development of new products and product indication expansions, it distinguishes itself with optionality in treatment regiments, innovative packaging, and unique medication delivery systems. Baxter has a robust product pipeline because of its targeted investment in research and development (R&D), which we believe will help it remain competitive in an industry facing relatively fast innovation cycles for certain products. R&D spending was $946 million (7% of revenues) and acquisition spending was $590 million in 2011. Pricing remains under pressure from large purchasing groups in the U.S. and international tenders. Certain of Baxter's markets (e.g., plasma products) have commodity-like characteristics. Plasma pricing and demand, which declined in 2010, rebounded in 2011, and Baxter benefited by about $100 million from Octapharma AG's absence in the plasma market. Baxter plans to upgrade its older plasma-fractionation facility in the second half of 2012 to position itself for future growth and is beginning construction of a new facility in Covington, Georgia. It also recently entered into a manufacturing services agreement with Stichting Sanquin Bloedvoorziening that will provide up to 1.6 mil liters of incremental plasma fractionation capacity. Liquidity Our short-term credit rating on Baxter is 'A-1'. We believe Baxter has strong liquidity to meet its needs over the next two to three years. Our view of its liquidity profile incorporates the following expectations: -- We expect liquidity sources (primarily cash, discretionary cash flow, and revolving credit facilities) to exceed uses (including dividends and anticipated share repurchases) by about 2x over the next two to three years. -- We expect liquidity sources to continue to exceed uses, even if EBITDA declines by 30%. -- We believe Baxter can absorb a high-impact, low-probability event. -- We believe Baxter has well-established bank relationships. Baxter's strong liquidity is evidenced by $2.2 billion of cash and equivalents on June 30, 2012, and cash flow from operations of $3.2 billion for the 12 months ended June 30, 2012, generously covering capital expenditures of $1.1 billion for that period. Baxter's low effective income tax rate of about 21% enhances free cash flow. The company manages its tax strategy to generate sufficient cash denominated in U.S. dollars to fund U.S. cash needs. Baxter's commercial paper programs ($1.4 billion), used to support operational requirements, are backed up by a $1.5 billion revolving credit facility that matures in June 2015. It also maintains a $396 million (at Dec. 31, 2011) euro-denominated credit facility maturing in January 2013. At March 31, 2012, Baxter had no commercial paper outstanding, and both the revolvers were undrawn. Baxter has a capital allocation guideline to return about 35% to 40% of internally generated cash to shareholders. It recently increased its dividend by 34%, which will translate into a roughly 40% payout ratio. Although Baxter concurrently announced a $2 billion share repurchase program, we expect that share repurchases will be tempered in line with Baxter's policy regarding total return to shareholders. The use of cash to buy back stock does not impair Baxter's credit profile because of its strong liquidity position, and we do not believe it is contemplating any sizable acquisitions. It has no onerous rating triggers. Outlook Our rating outlook on Baxter is stable. Product diversity should help the company absorb setbacks of any one product line. We do not believe revenue declines or operating losses would be material enough to cause a downgrade, but we could lower our ratings if financial policy changes so much that management does not commit to maintaining a modest financial risk profile. We believe Baxter has sufficient financial cushion to make midsized acquisitions that modestly increase debt, but debt-financed acquisitions or share repurchases that increase adjusted debt leverage to 2x (without expectations of rapid de-leveraging) could result in a downgrade. Related Criteria And Research -- Methodology: Short-Term/Long-Term Ratings Linkage Criteria For Corporate And Sovereign Issuers, May 15, 2012 -- Liquidity Descriptors for Global Corporate Issuers, Sept. 28, 2011 -- Business Risk/Financial Risk Matrix Expanded, May 27, 2009 -- Standard & Poor's Revises Its Approach To Rating Speculative-Grade Credits, May 13, 2008 -- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008 -- 2008 Corporate Criteria: Rating Each Issue, April 15, 2008 Ratings List Ratings Affirmed Baxter International Inc. Corporate Credit Rating A+/Stable/A-1 Senior Unsecured A+ Commercial Paper A-1 Baxter Holdings B.V. Commercial Paper A-1 New Rating Baxter International Inc. Senior Unsecured $750 mil nts A+ Complete ratings information is available to subscribers of RatingsDirect on the Global Credit Portal at www.globalcreditportal.com. All ratings affected by this rating action can be found on Standard & Poor's public Web site at www.standardandpoors.com. 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