(The following statement was released by the rating agency)
CHICAGO, May 19 (Fitch) Fitch Ratings has assigned an 'A-'
AmerisourceBergen Corp.'s (NYSE: ABC) proposed $1 billion senior
issuance. Proceeds from the issuance are expected to be used for
of ABC's $500 million of unsecured bonds due Sept. 2015 and for
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
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
3-year tenor of one tranche, and the firm's assertion that
will be held for future re-issuance, as supportive of its
intentions. Fitch's current forecasts yield cash generation
sufficient over the
ratings horizon to facilitate the repayment of the 3-year
tranche upon maturity
The issuance will, nevertheless, constrain ABC's ratings
flexibility in the near
term, as Fitch estimates that reported debt leverage (gross
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
earnings growth from ramping generic drug volumes to WAG over
the remainder of
ABC's fiscal 2014 will be sufficient to drive moderation in
leverage to around 1.3x by Sept. 30, 2014. Notably, debt
leverage sustained at
this figure provides limited flexibility for the incurrence of
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
industry's oligopolistic nature and steady pharmaceutical
distribution, though low margin, is relatively insulated from
regulatory pressures faced by other areas of healthcare in the
-- 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
significant incremental distribution volumes and improved
prospects and stability. Fitch expects the relationship will
top-line growth, stronger cash flows, and incremental margin
opportunities over the ratings horizon, though initially
resulting in a
significant drop in profit margins and material cash outflows
-- Fitch believes there are limited growth opportunities in the
drug distribution space. As a result, and now more so
alignment with WAG-AB, Fitch expects ABC to responsibly pursue
service-related and non-U.S. markets (i.e. minority investment
Distribuidora) over the intermediate- to longer-term.
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
Scripts, Inc. and WAG distribution contracts. However, these
long-term stability to ABC's operations, and Fitch expects ABC
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
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
pressures than Fitch currently expects and/or by a transaction
leverage sustainably above 1.3x or that illustrates a departure
traditional commitment to its core drug distribution business.
Fitch notes the
risks associated with ABC's recently announced alignment with
cash outflows associated with working capital and the offsetting
associated with the exercise of warrants issued to WAG-AB,
repurchases and hedging transactions. Nevertheless, Fitch does
not expect these
risks to precipitate a negative rating action over the ratings
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.
Jacob Bostwick, CPA
Fitch Ratings, Inc.
70 W. Madison Street
Chicago, IL 60602
Bob Kirby, CFA
Media Relations: Brian Bertsch, New York, Tel: +1 212-908-0549,
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.
--'Trekking the Path to Biosimilars - Forging Ahead' (Aug. 5,
--'U.S. Healthcare Stats Quarterly - First-Quarter 2013' (June
--'Vital Signs - Currents in the Drug Channel' (Podcast) (April
--'Navigating the Drug Channel - Drug Distributors: A Deeper
Dive' (April 24,
--'Fitch: Walgreens Deal Likely Positive for AmerisourceBergen;
Ratings Impact' (March 19, 2013).
Applicable Criteria and Related Research:
Navigating the Drug Channel -- Drug Distributors: A Deeper Dive
Vital Signs -- Currents in the Drug Channel
U.S. Healthcare Stats Quarterly - First-Quarter 2013
Trekking the Path to Biosimilars -- Forging Ahead
Corporate Rating Methodology: Including Short-Term Ratings and
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