Fitch Rates Express Scripts' Proposed Bond Offering 'BBB'; Outlook Stable

Mon Jun 2, 2014 10:06am EDT

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(The following statement was released by the rating agency) CHICAGO, June 02 (Fitch) Fitch Ratings has assigned a 'BBB' rating to the proposed senior unsecured bond issuance by Express Scripts Holding Company (NYSE:ESRX). Proceeds from the issuance are expected to be used for the redemption of ESRX's $900 million and $1.25 billion of unsecured bonds due November 2014 and November 2016, respectively, and for general corporate purposes (including some share repurchase). Fitch currently rates ESRX's IDR 'BBB' with a Stable Rating Outlook. A full list of ratings for ESRX follows at the end of this release. The bonds will be cross guaranteed by ESRX's two other issuing entities, Express Scripts, Inc. and Medco Health Solutions, Inc. and, as a result, will rank pari passu with all existing unsecured debt currently outstanding in ESRX's capital structure. KEY RATING DRIVERS --ESRX is the largest pharmacy benefit management (PBM) and third-largest pharmacy operator in the U.S. Fitch expects such scale to continue enabling ESRX to negotiate favorable purchasing discounts and pricing rebates and to leverage its fixed costs, especially associated with mail-order pharmacy. --ESRX achieved its leverage target of 2x subsequent to its merger with Medco Health Solutions, Inc., using nearly $4.2 billion of cash flows for debt repayment in the second half of 2012 (2H'12) and fiscal year 2013 (FY13). Fitch-calculated debt leverage was 2.07x at March 31, 2014. Management says the bulk of core integration tasks are largely complete; though some additional capacity and cost rationalization is planned for 2014. --Stable and robust cash flows are driven by strong working capital management and efficient operations, despite relatively low margins. Fitch forecasts free cash flow (FCF) of approximately $4.4 billion in 2014. Strong cash flows and a solid liquidity profile afford incremental ratings flexibility in light of debt leverage toward the upper end of the current 'BBB' range. --ESRX has been an active acquirer over the past decade, often employing large debt balances to fund deals. The possibility for large-scale M&A and accompanying leverage spikes, albeit lower now given ESRX's very large size, pressure the ratings somewhat. Notably, the firm has routinely executed on its outlined de-leveraging plans, reducing leverage appropriately within 12-18 months of each deal. --Some pricing pressure is possible from consolidating clients over the ratings horizon. Current trends support increasing consolidation in many areas of healthcare, including among health insurers. Increasing competition and an apparent willingness to experiment with new models on the part of PBM clients creates opportunities for both risk and reward to ESRX's growth prospects over the medium term. --ESRX's public guidance for total adjusted script declines of 4%-9% implies weaker utilization and possibly more client losses than Fitch had initially expected. Though 2014 and possibly 2015 may be somewhat weak, Fitch believes ESRX's longer-term growth will fare more positively as tailwinds from healthcare reform, specialty market growth, demographics, and ongoing cost containment efforts by payers drive PBM volumes and utilization of more value-add services. RATING SENSITIVITIES Maintenance of the current 'BBB' ratings will require debt-to-EBITDA of around 2x or below, accompanied by continued robust cash flows and steady longer-term script growth in the low- to mid-single digits. Completion of final Medco integration and cost rationalization efforts in 2014, with evidence of better underlying growth drivers in 2015+, will likely contribute to incremental flexibility at the 'BBB' ratings in the medium term. A positive rating action is not contemplated over the ratings horizon, but could be supported by profitability and base business growth that outpaces Fitch's current expectations. Fitch notes that the firm's strong cash flow profile provides significant de-leveraging capabilities in the event of debt-funded mergers and acquisitions (M&A). Furthermore, Fitch believes it is unlikely that broader industry dynamics alone will contribute to significant ratings pressure over the ratings horizon. But the prioritization of cash flows for shareholder-friendly activities over debt repayment in the event of large-scale M&A or operational stress, resulting in debt leverage materially and durably above 2x, could drive a negative rating action. A possible stress scenario envisions the possibility of prolonged negative underlying script growth, possibly due to customer losses more severe than Fitch currently expects. Fitch rates ESRX as follows: Express Scripts Holding Company --Long-term IDR 'BBB'; --Unsecured bank facility 'BBB'; --Unsecured notes 'BBB'. The Rating Outlook is Stable. Express Scripts, Inc. --Long-term IDR 'BBB'; --Unsecured notes 'BBB'. The Rating Outlook is Stable. Medco Health Solutions, Inc. --Long-term IDR 'BBB'; --Unsecured notes 'BBB'. The Rating Outlook is Stable. Contact: Primary Analyst Jacob Bostwick, CPA Director +1-312-369-3169 Fitch Ratings, Inc., 70 W Madison Street, Chicago, IL 60602 Secondary Analyst Bob Kirby, CFA Director +1-312-368-3147 Committee Chairperson Sean Sexton Managing Director +1-312-368-3130 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); --'U.S. Healthcare Stats Quarterly - Third-Quarter 2013' (Jan 2, 2014); --'2014 Outlook: U.S. Healthcare - Secular Challenges Require a Compelling Value Proposition' (Nov. 25, 2013); --'Trekking the Path to Biosimilars - The Destination' (Oct. 4, 2013); --'Navigating the Drug Channel - PBMs: In Flux (March 27, 2012). Applicable Criteria and Related Research: Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage here U.S. Healthcare Stats Quarterly —Third-Quarter 2013 here 2014 Outlook: U.S. Healthcare — Secular Challenges Require a Compelling Value Propositihere Trekking the Path to Biosimilars -- The Destinatihere Navigating the Drug Channel: Pharmacy Benefit Managers (PBMs) in Flux 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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