Fitch Rates McKesson's Proposed Senior Unsecured Notes 'A-'
NEW YORK -- November 29, 2012
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-'
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.
Additional information is available at 'www.fitchratings.com'.The ratings
above were solicited by, or on behalf of, the issuer, and therefore, Fitch has
been compensated for the provision of the ratings.
Applicable Criteria & Related Research:
--'Corporate Rating Methodology' (Aug. 8, 2012);
--'Short-Term Ratings Criteria for Non-Financial Corporates' (Aug. 9, 2012);
--'Fitch: McKesson's Ratings Initially Unchanged by PSS World Acquisition
Announcement (Oct. 25, 2012);
-- 'Navigating the Drug Channel - Drug Distributors: A Deeper Dive' (Mar. 13,
Applicable Criteria and Related Research:
Navigating the Drug Channel -- Drug Distributors: A Deeper Dive
Short-Term Ratings Criteria for Non-Financial Corporates
Corporate Rating Methodology
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Jacob Bostwick, CPA
70 W. Madison Street
Chicago, IL 60602
Bob Kirby, CFA
Brian Bertsch, +1-212-908-0549 (New York)
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