RPT-Fitch upgrades Bayer to 'A'; outlook stable
(Repeating for additional subscribers) (The following statement was released by the rating agency) March 18 Fitch Ratings has upgraded Germany-based healthcare company Bayer AG's (Bayer) Long-term Issuer Default Rating (IDR) and senior unsecured rating, to 'A' from 'A-' with a Stable Outlook and the Short-term IDR to 'F1' from 'F2'. In addition Fitch has upgraded the hybrid instrument rating to 'BBB+' from 'BBB'. The rating action follows Bayer's improved operating performance and financial positioning following its strong results published for 2012. During 2012 Bayer's sales grew at 5.3% yoy portfolio-adjusted and at constant exchange rates while group EBITDA margin remained about flat at 20% and net debt was reduced by EUR2.1bn. Benefitting from a solid R&D product pipeline and solid organic growth, Fitch expect the revenues from the highly profitable healthcare segment to increase as a percentage of group sales, leading to a slightly improved group EBITDA margin over time. KEY DRIVERS Debt protection measures expected to remain solid: Bayer's funds from operations (FFO) adjusted net leverage stood at 1.77x at end-2012 (end-2011: 1.98x), while the adjusted FFO fixed charge coverage was 5.87x (2011: 5.76x). Further deleveraging expected: Some further year-on-year improvement in Bayer's debt protection measures is expected by Fitch for 2013, driven by solid cash flow generation. Little patent expiry and full R&D pipeline will help growth: Bayer's sales at risk to be lost by upcoming US patent expiry to 2015 stood at 1%, with no major US patent expiries until 2014, when Avalox's and Kogenate's US patents expire. This is a low percentage for the industry. Given Bayer's full late-stage R&D product pipeline, including the potential blockbuster drugs Alpharadin (Bone metastases), Regorafenib (Cancer) and Riociguat (pulmonary hypertension ) as well as the recently approved Eylea (VEGF-Trap Eye) (approved by the Food and Drug Administration in September 2012), Bayer's pharmaceuticals business is expected to show solid organic growth over time. Exposure to cyclicality to continue: Its presence in Material Science exposes Bayer to cyclical industries such as automotive, construction and electronics and raw material price swings, while its Crop Science performance is linked to the volatility in commodity prices and weather conditions. These businesses accounted for 39% of group EBITDA before special items in 2012. No major acquisitions needed: Given Bayer's improved positioning in its pharmaceuticals segment and its firm market positioning in OTC, Material Science and Crop Science, no major acquisitions are needed for Bayer in order to continue to show solid organic growth. This is in contrast to some other companies, such as AstraZeneca, being exposed to major patent expiration. RATING SENSITIVITY GUIDANCE Positive: Future developments that could lead to positive rating actions include: - Further improvement in its FFO adjusted net leverage to 1.0x or below on a continuing basis - FFO fixed charge cover above 10x. - In addition to this, Fitch would consider an upgrade if a larger proportion of sales was derived from the healthcare segment. - A positive rating action would also require a significant reduction in the current level of pension liabilities. Negative: Future developments that could lead to negative rating action include: - FFO adjusted net leverage ratio above 2x on a continuing basis for example as a result of a severe drop in EBITDA as a result of an adverse economic environment or driven by large debt-financed acquisitions or significant litigation payouts. - FFO fixed charge cover below 7x.