Fitch Rates AmerisourceBergen's Proposed $1B Bond Offering 'A-'; Outlook
CHICAGO -- May 19, 2014
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
-- 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
-- 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.
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
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.
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,
--'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
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 Parent and
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Fitch Ratings, Inc.
Jacob Bostwick, CPA, +1-312-368-3169
Fitch Ratings, Inc.
70 W. Madison Street
Chicago, IL 60602
Bob Kirby, CFA, +1-312-368-3147
Michael Weaver, +1-312-368-3156
Brian Bertsch, +1-212-908-0549
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