Fitch Rates AmerisourceBergen's Proposed $1B Bond Offering 'A-'; Outlook Stable

Mon May 19, 2014 10:10am EDT

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(The following statement was released by the rating agency) CHICAGO, May 19 (Fitch) Fitch Ratings has assigned an 'A-' rating to AmerisourceBergen Corp.'s (NYSE: ABC) proposed $1 billion senior unsecured bond issuance. Proceeds from the issuance are expected to be used for the redemption of ABC's $500 million of unsecured bonds due Sept. 2015 and for general corporate purposes, including the repurchase of stock. ABC's Issuer Default Rating (IDR) is 'A-', with a Stable Rating Outlook. A full list of ratings for ABC follows at the end of this release. Fitch views the incurrence of additional debt - albeit for the repurchase of stock - as tenable at the 'A-' rating. The stock repurchase is meant to offset dilution associated with the pending warrant exercise by Walgreen Co. (WAG) and Alliance Boots GmbH (AB) in 2016 and 2017. Fitch sees the relatively short 3-year tenor of one tranche, and the firm's assertion that repurchased stock will be held for future re-issuance, as supportive of its dilution-offset intentions. Fitch's current forecasts yield cash generation sufficient over the ratings horizon to facilitate the repayment of the 3-year tranche upon maturity in 2017. The issuance will, nevertheless, constrain ABC's ratings flexibility in the near term, as Fitch estimates that reported debt leverage (gross debt-to-EBITDA) will approximate 1.6x-1.7x, based on Fitch-calculated EBITDA of $1.18 billion for the LTM period ended March 31, 2014. However, Fitch anticipates top-line and earnings growth from ramping generic drug volumes to WAG over the remainder of ABC's fiscal 2014 will be sufficient to drive moderation in reported debt leverage to around 1.3x by Sept. 30, 2014. Notably, debt leverage sustained at this figure provides limited flexibility for the incurrence of additional long-term debt. The notes will rank pari passu with all currently existing unsecured debt and include a change of control repurchase provision (at 101%) upon both a change of control and subsequent downgrade of the notes to non-investment grade. Change of control triggers are customary. KEY RATING DRIVERS -- U.S. drug distributors maintain stable operating profiles due to the industry's oligopolistic nature and steady pharmaceutical demand. Drug distribution, though low margin, is relatively insulated from pricing and regulatory pressures faced by other areas of healthcare in the U.S. -- ABC maintains strong credit metrics through its consistently strong core cash generation, efficient operations, and commitment to operating with low debt leverage. The aforementioned issuance will push leverage toward the upper end of the 'A-' ratings; but de-leveraging is expected owing to top-line and earnings growth from ramping WAG generic drug volumes over the remainder of fiscal 2014. -- A strong liquidity position provides ample flexibility for the firm to fund significant working capital and other cash requirements ahead of and during the beginning of its distribution contract with Walgreens. -- Fitch views favorably ABC's alignment with WAG and AB, as it provides significant incremental distribution volumes and improved long-term growth prospects and stability. Fitch expects the relationship will drive increased top-line growth, stronger cash flows, and incremental margin expansion opportunities over the ratings horizon, though initially resulting in a significant drop in profit margins and material cash outflows for working capital. -- Fitch believes there are limited growth opportunities in the traditional U.S. drug distribution space. As a result, and now more so considering ABC's alignment with WAG-AB, Fitch expects ABC to responsibly pursue growth in service-related and non-U.S. markets (i.e. minority investment in Profarma Distribuidora) over the intermediate- to longer-term. RATING SENSITIVITIES Maintenance of ABC's 'A-' long-term ratings will generally require the firm to operate with gross debt leverage at or below 1.3x. EBITDA margins have declined significantly in recent quarters due to the onboarding of the new Express Scripts, Inc. and WAG distribution contracts. However, these contracts add long-term stability to ABC's operations, and Fitch expects ABC to generate steady to moderately expanding EBITDA margins beginning in second-half 2014, in support of the firm's current ratings. An upgrade to 'A' is not expected over the ratings horizon. Fitch believes ABC's management would need to commit to operating with gross debt leverage below 0.75x, accompanied by increased profit margins and cash flows, to achieve an upgrade to 'A'. Fitch does not expect ABC to commit to operating with such low leverage in the near- to intermediate-term. Negative ratings momentum could be caused by greater and more direct pricing pressures than Fitch currently expects and/or by a transaction which drives leverage sustainably above 1.3x or that illustrates a departure from ABC's traditional commitment to its core drug distribution business. Fitch notes the risks associated with ABC's recently announced alignment with WAG-AB, including cash outflows associated with working capital and the offsetting of dilution associated with the exercise of warrants issued to WAG-AB, including stock repurchases and hedging transactions. Nevertheless, Fitch does not expect these risks to precipitate a negative rating action over the ratings horizon. Fitch rates ABC as follows: --Long-term IDR 'A-'; --Short-term IDR 'F2'; --Senior unsecured bank facility 'A-'; --Senior unsecured notes 'A-'; --Commercial paper 'F2'. The Rating Outlook is Stable. Contact: Primary Analyst Jacob Bostwick, CPA Director +1-312-368-3169 Fitch Ratings, Inc. 70 W. Madison Street Chicago, IL 60602 Secondary Analyst Bob Kirby, CFA Director +1-312-368-3147 Committee Chairperson Michael Weaver Managing Director +1-312-368-3156 Media Relations: Brian Bertsch, New York, Tel: +1 212-908-0549, Email: brian.bertsch@fitchratings.com. Additional information is available at 'www.fitchratings.com'. Applicable Criteria and Related Research: --'Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage' (Aug. 5, 2013); --'Fitch Affirms L-T Ratings of AmerisourceBergen at 'A-'; Outlook Stable (Sept. 17, 2013); --'Trekking the Path to Biosimilars - Forging Ahead' (Aug. 5, 2013); --'U.S. Healthcare Stats Quarterly - First-Quarter 2013' (June 25, 2013); --'Vital Signs - Currents in the Drug Channel' (Podcast) (April 25, 2013); --'Navigating the Drug Channel - Drug Distributors: A Deeper Dive' (April 24, 2013); --'Fitch: Walgreens Deal Likely Positive for AmerisourceBergen; No Immediate Ratings Impact' (March 19, 2013). Applicable Criteria and Related Research: Navigating the Drug Channel -- Drug Distributors: A Deeper Dive here Vital Signs -- Currents in the Drug Channel here U.S. Healthcare Stats Quarterly - First-Quarter 2013 here Trekking the Path to Biosimilars -- Forging Ahead here Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage here Additional Disclosure Solicitation Status here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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