Nov 29 - Fitch Ratings has assigned an 'A-' rating to McKesson Corporation's
(McKesson) planned issuance of $900 million of new senior unsecured
notes. Proceeds are intended to refinance $400 million of notes that were repaid
in February 2012 and to prefund $500 million of notes due in March 2013.
A full list of McKesson's ratings is provided at the end of this release. The
Rating Outlook is Stable.
KEY RATING CONSIDERATIONS
-- Continued stable operating profile with low but steady margins, supported as
of late by the now-occurring branded drug patent cliff;
-- Solid liquidity and strong cash generation;
-- The expectation for an increased debt load, likely toward the upper end of
the range for McKesson's current 'A-' ratings, subsequent to the recently
announced issuance and the pending acquisition of PSS World Inc.;
-- Position as the largest and most diversified player in the oligopolistic U.S.
drug distribution industry, including strong market share of the higher-margin
and -growth specialty distribution market.
RATING ACTION TRIGGERS
Maintenance of McKesson's 'A-' Issuer Default Rating (IDR) will require
debt-to-EBITDA generally maintained at or below 1.4x. Temporary increases above
this range to fund appropriate M&A, such as the PSS World acquisition, will
likely be tolerated so long as the Fitch believes the company is committed to
reducing debt leverage to below 1.4x within 12-18 months. Continued strong and
steady cash flows accompanied by growing profit margins, driven by the generic
wave, are also expected to support the current 'A-' ratings.
A downgrade could result from a debt-funded acquisition causing debt leverage to
be sustained above 1.4x for greater than 12 months, or by a material debt-funded
shareholder-friendly transaction. An upgrade is not expected over the ratings
horizon. Fitch believes debt leverage would need to be sustained below 0.75x to
support an upgrade to 'A'.
STRONG LIQUIDITY AND FAVORABLE DEBT MATURITY PROFILE
McKesson's liquidity profile at Sept. 30, 2012 consisted of $2.8 billion of cash
on hand ($1.6 billion of which is overseas), an undrawn $1.3 billion revolver
due Sept. 2016, and an undrawn $1.35 billion accounts receivable facility due
May 2013. Debt maturities are well-laddered and manageable for the firm. Not
including the proposed issuance, McKesson's long-term debt matures as follows:
$500 million in fiscal 2013, $350 in 2014, $600 million in 2016, $500 million in
2017, and $1.63 billion thereafter.
Fitch rates McKesson as follows:
-- Long-term IDR 'A-';
-- Senior unsecured bank facility 'A-';
-- Senior unsecured notes at 'A-';
-- Short-term IDR at 'F2';
-- Commercial paper at 'F2'.
The Rating Outlook is Stable.