February 13, 2017 / 2:15 PM / 9 months ago

Fitch Rates McKesson's EUR and GBP Notes 'BBB+'; Outlook Stable

(The following statement was released by the rating agency) NEW YORK, February 13 (Fitch) Fitch Ratings has assigned 'BBB+' ratings to the EUR and GBP denominated senior unsecured notes issued by McKesson Corp. (NYSE: MCK). A full list of ratings follows at the end of the release. KEY RATING DRIVERS Stable Operations, Low Margins The credit profiles of MCK and its peers benefit from stable operating profiles and consistent cash generation. Steady pharmaceutical demand, an oligopolistic drug distribution industry in the U.S. and, for the most part, in Western Europe, and relative insulation from most drug pricing and regulatory pressures, support strong ratings despite very low margins. Increased Competitive Pressures The recent repricing of certain independent pharmacy GPO contracts in 2016 represent another weakening of MCK's competitive positioning, albeit also affecting MCK's peers, following key losses in calendar 2015 (or pending losses) as many of its largest customers (Rite Aid, Omnicare, Target, OptumRx) were involved in key M&A transactions. This weakened positioning is most evident in MCK's generic sourcing scale, which Fitch now estimates as lagging that of both Walgreens-AmerisourceBergen and CVS Health-Cardinal Health and, in Fitch's view, contributed to the generic sourcing JV with Wal-Mart rather than Wal-Mart simply becoming a party to MCK's generic purchasing. Leading Market Positions MCK is expected to continue to hold top market positions (#1 or near #2) in pharmaceutical and non-acute care medical distribution, including of specialty pharmaceuticals, in both the U.S. and Canada. The firm's European business is also market-leading in distribution and pharmacy operations. Solid Liquidity, Cash Generation MCK maintains a solid liquidity position, supported by strong cash flows and strong access to capital markets. Fitch expects annual FFO and FCF to exceed $3 billion and $2 billion, respectively, but notes that FCF can be affected by large working capital swings inherent to large healthcare distributors. Non-U.S. Operations More Risky Fitch generally sees non-U.S. drug channels, particularly in Europe, as less stable and higher risk than in the U.S., especially given the diversity of regulatory and reimbursement systems. But inorganic growth opportunities are more prevalent in markets outside the U.S., so MCK's presence in Europe is important for long-term growth prospects. RATING SENSITIVITIES Maintenance of MCK's 'BBB+' IDR considers gross debt/EBITDA generally in the range of 1.4x to 2x, with continued strong and steady cash flows, accompanied by stable or modestly expanding underlying margins. Cash flows and liquidity are strong for the rating category. Flexibility is expected to be ample but limited in calendar 2017. Negative rating actions are not expected to explicitly result from recent shifts in the industry's competitive and pricing dynamics - namely lower branded inflation and key contract losses/revisions - though MCK's margins could be pressured compared to peers. A downgrade to 'BBB' could be driven by material debt-funded acquisitions or share repurchases, or more significant margin pressures than are currently expected, resulting in gross debt/EBITDA expected to be sustained at or above 2x. Cash generation and liquidity in a reasonable stress scenario could still support absolute debt repayment, so a downgrade would most likely be tied to management's capital deployment decision-making. A positive rating action is not currently anticipated over the ratings horizon. Fitch does not expect MCK to reduce gross debt/EBITDA to 1.4x or below, although cash generation and internal liquidity are expected to be more than sufficient to do so. KEY ASSUMPTIONS Fitch's Ratings Case forecast incorporates the following assumptions: Top line growth of 4% in fiscal 2017 and a decline of 2% in 2018. Growth in 2017 is supported by the expanded Albertsons contract, recent acquisitions, specialty, and stability in med-surg, offset by lost business (OptumRx, Omnicare generics, Target generics). Revenue decline of 2% in fiscal 2018 is mostly the result of the expected loss of Rite Aid distribution volumes gradually in the first half of the fiscal year, offset by the addition of Walmart generics. Fitch forecasts assume both the loss of Rite Aid and the addition of Wal-Mart generics in MCK's fiscal 1Q'2018. Fitch may revise this assumption as updated terms and likelihood of the Walgreens / Rite Aid transaction crystallize. Ramping margin pressures in fiscal 2017 to 2018 Margin pressure is most acute from lower branded price appreciation and heightened competitive pressures particularly among independent pharmacy customers, leading to double-digit EBITDA margin declines (rate of change) in both fiscal 2017 and 2018. Continuing margin pressures in fiscal 2018 are offset somewhat by ongoing cost reduction programs, and upside is possible depending on the timing and pacing of Wal-Mart generics onboarding. FFO Approximating $3 in Fiscal 2017 and 2018 FFO to be generated from projected cash flow from operations of $4 billion and $3.2 billion, respectively. An expectation for a meaningfully positive working capital benefit, especially in 2017, supports cash generation despite declining absolute EBITDA. Notably, working capital is subject to large day-to-day swings which could cause FCF to fluctuate. Cash flows will be aided over in coming years from proceeds related to the divestiture of certain technology businesses ($1.25 billion expected in fiscal 2017 from initial transaction). Relatively Steady Debt Balances, Yielding Gross Debt/EBITDA Around 1.9x in 2017 to 2018 Fitch does not expect MCK to use FCF for meaningful long-term debt reduction over the ratings horizon, instead allocating the majority of discretionary FCF to M&A and share repurchase activity. LIQUIDITY MCK maintains a strong liquidity position. The firm's new $3.5 billion revolver, which replaced its previous revolvers and A/R facilities, provides ample liquidity for working capital and other temporary financing requirements and backup to MCK's commercial paper program. Fitch assumes major drug distributors seek to keep $1 billion to $2 billion of cash available for day-to-day operations. All U.S. cash ($0.6 billion) is considered Readily Available. Access to external liquidity is adequate. Well-Laddered Maturities Debt maturities are relatively well-laddered and manageable, with proceeds from the offering available to fund recent and upcoming debt maturities. FCF is expected to routinely outpace debt maturities, leaving flexibility for M&A or share repurchase activity. FULL LIST OF RATINGS Fitch currently rates MCK as follows: --Long-term IDR 'BBB+'; --Short-term IDR 'F2'; --Senior unsecured bank facility 'BBB+'; --Senior unsecured notes 'BBB+' --Commercial Paper 'F2'. Contact: Primary Analyst Britton Costa, CFA Director +1-212-908-0524 Fitch Ratings, Inc. 33 Whitehall Street New York, NY 10004 Secondary Analyst Bob Kirby, CFA Director +1-312-368-3147 Committee Chairperson David Peterson Senior Director +1-312-368-3777 Media Relations: Alyssa Castelli, New York, Tel: +1 (212) 908 0540, Email: alyssa.castelli@fitchratings.com. Date of Relevant Rating Committee: Dec. 15, 2016 Additional information is available at www.fitchratings.com. No material financial statement adjustments were made other than those customary within U.S. Corporates (i.e. the removal of non-cash and non-recurring expenses, such as stock-based compensation expense, from the calculation of EBITDA). Applicable Criteria Criteria for Rating Non-Financial Corporates (pub. 27 Sep 2016) here Additional Disclosures Solicitation Status here Endorsement Policy 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 WEB SITE AT 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. Copyright © 2017 by Fitch Ratings, Inc., Fitch Ratings Ltd. and its subsidiaries. 33 Whitehall Street, NY, NY 10004. Telephone: 1-800-753-4824, (212) 908-0500. Fax: (212) 480-4435. Reproduction or retransmission in whole or in part is prohibited except by permission. All rights reserved. In issuing and maintaining its ratings and in making other reports (including forecast information), Fitch relies on factual information it receives from issuers and underwriters and from other sources Fitch believes to be credible. Fitch conducts a reasonable investigation of the factual information relied upon by it in accordance with its ratings methodology, and obtains reasonable verification of that information from independent sources, to the extent such sources are available for a given security or in a given jurisdiction. The manner of Fitch’s factual investigation and the scope of the third-party verification it obtains will vary depending on the nature of the rated security and its issuer, the requirements and practices in the jurisdiction in which the rated security is offered and sold and/or the issuer is located, the availability and nature of relevant public information, access to the management of the issuer and its advisers, the availability of pre-existing third-party verifications such as audit reports, agreed-upon procedures letters, appraisals, actuarial reports, engineering reports, legal opinions and other reports provided by third parties, the availability of independent and competent third- party verification sources with respect to the particular security or in the particular jurisdiction of the issuer, and a variety of other factors. Users of Fitch’s ratings and reports should understand that neither an enhanced factual investigation nor any third-party verification can ensure that all of the information Fitch relies on in connection with a rating or a report will be accurate and complete. Ultimately, the issuer and its advisers are responsible for the accuracy of the information they provide to Fitch and to the market in offering documents and other reports. In issuing its ratings and its reports, Fitch must rely on the work of experts, including independent auditors with respect to financial statements and attorneys with respect to legal and tax matters. Further, ratings and forecasts of financial and other information are inherently forward-looking and embody assumptions and predictions about future events that by their nature cannot be verified as facts. As a result, despite any verification of current facts, ratings and forecasts can be affected by future events or conditions that were not anticipated at the time a rating or forecast was issued or affirmed. The information in this report is provided “as is” without any representation or warranty of any kind, and Fitch does not represent or warrant that the report or any of its contents will meet any of the requirements of a recipient of the report. A Fitch rating is an opinion as to the creditworthiness of a security. This opinion and reports made by Fitch are based on established criteria and methodologies that Fitch is continuously evaluating and updating. Therefore, ratings and reports are the collective work product of Fitch and no individual, or group of individuals, is solely responsible for a rating or a report. The rating does not address the risk of loss due to risks other than credit risk, unless such risk is specifically mentioned. Fitch is not engaged in the offer or sale of any security. All Fitch reports have shared authorship. Individuals identified in a Fitch report were involved in, but are not solely responsible for, the opinions stated therein. The individuals are named for contact purposes only. A report providing a Fitch rating is neither a prospectus nor a substitute for the information assembled, verified and presented to investors by the issuer and its agents in connection with the sale of the securities. Ratings may be changed or withdrawn at any time for any reason in the sole discretion of Fitch. Fitch does not provide investment advice of any sort. Ratings are not a recommendation to buy, sell, or hold any security. Ratings do not comment on the adequacy of market price, the suitability of any security for a particular investor, or the tax-exempt nature or taxability of payments made in respect to any security. Fitch receives fees from issuers, insurers, guarantors, other obligors, and underwriters for rating securities. Such fees generally vary from US$1,000 to US$750,000 (or the applicable currency equivalent) per issue. In certain cases, Fitch will rate all or a number of issues issued by a particular issuer, or insured or guaranteed by a particular insurer or guarantor, for a single annual fee. Such fees are expected to vary from US$10,000 to US$1,500,000 (or the applicable currency equivalent). The assignment, publication, or dissemination of a rating by Fitch shall not constitute a consent by Fitch to use its name as an expert in connection with any registration statement filed under the United States securities laws, the Financial Services and Markets Act of 2000 of the United Kingdom, or the securities laws of any particular jurisdiction. Due to the relative efficiency of electronic publishing and distribution, Fitch research may be available to electronic subscribers up to three days earlier than to print subscribers. For Australia, New Zealand, Taiwan and South Korea only: Fitch Australia Pty Ltd holds an Australian financial services license (AFS license no. 337123) which authorizes it to provide credit ratings to wholesale clients only. Credit ratings information published by Fitch is not intended to be used by persons who are retail clients within the meaning of the Corporations Act 2001

Our Standards:The Thomson Reuters Trust Principles.
0 : 0
  • narrow-browser-and-phone
  • medium-browser-and-portrait-tablet
  • landscape-tablet
  • medium-wide-browser
  • wide-browser-and-larger
  • medium-browser-and-landscape-tablet
  • medium-wide-browser-and-larger
  • above-phone
  • portrait-tablet-and-above
  • above-portrait-tablet
  • landscape-tablet-and-above
  • landscape-tablet-and-medium-wide-browser
  • portrait-tablet-and-below
  • landscape-tablet-and-below