Fitch Downgrades Allergan's Ratings; Affirms Actavis at 'BBB-'; Outlook Stable
A full list of rating actions, which apply to approximately \$44 billion of debt following the close of the Actavis-Allergan merger, follows at the end of this release.
KEY RATING DRIVERS
--Fitch views the combination of Actavis and Allergan as strategically compelling. The resulting firm will be among the largest pharmaceutical firms in the world, with a differentiated business model that combines a strong generics business with a well-diversified, durable, and growing specialty drug business.
--Fitch's estimated pro forma gross debt-to-EBITDA, which exceeds 4.8x at deal close (before projected synergies), exhausts Actavis' flexibility at the 'BBB-' rating category in the near term. Nevertheless, strong cash generation is expected to be sufficient to facilitate rapid debt repayment and restore ratings flexibility in relatively short order.
--The Stable Outlook reflects Actavis' history of swift business integration and debt repayment following leveraging transactions and Fitch's expectation for dramatically moderated M&A activity going forward, citing management's strong assertion that the Allergan deal completes its transformation.
--Fitch forecasts organic top-line growth in the upper-single to low-double digits for the combined firm over the ratings horizon, driven by a strong portfolio of long duration assets and a generally favorable outlook for the global generic drug industry.
--Dependent on the faithful and successful completion of the firm's de-leveraging and synergy capture plans, Fitch expects Actavis' credit profile will show meaningful improvement in the years to come. Increased scale, improved profitability and diversification, and very strong cash generation post-deal imply that the business profile could support a higher credit rating.
RATING SENSITIVITIES
Ratings flexibility will be exhausted for the remainder of 2015. Maintenance of the current 'BBB-' ratings and Stable Outlook will require strict adherence to the firm's commitment to direct a significant component of free cash flow (FCF) toward debt repayment, with moderate amounts of cash used for tuck-in deals or the acquisition of developmental assets only.
The use of cash flows for material M&A activity or shareholder payments that disrupt progress reducing gross debt-to-EBITDA to below 3.5x within 18 months post-deal could drive a downward rating action. Nevertheless, the Stable Rating Outlook reflects Fitch's view that the combined firm is committed to de-leveraging and will generate sufficient cash flows to do so. Debt repayment will be facilitated by more than \$9 billion of pre-payable term debt outstanding at deal close, plus \$1.3 billion of 2016 bond maturities.
An upgrade will not be considered until material de-leveraging has been accomplished post-deal. But upward ratings momentum is expected to accompany faithful and successful implementation of the firm's integration and de-leveraging plans. Gross debt-to-EBITDA trending toward and expected to be maintained at or below 3x could result in an upgrade to 'BBB'. Fitch notes that several facets of the firm's credit profile, including its growth outlook, profitability, and strong product portfolio could support higher ratings than the current 'BBB-'.
KEY ASSUMPTIONS
--Top-line growth in the upper-single to low-double digits;
--EBITDA margins approaching the upper-40% range in 2016, with credit for the majority of Actavis' outlined synergy targets;
--Operating cash flow approaching \$8 billion or more in 2015 (pro forma) and \$9 billion in 2016;
--Capital expenditures around \$500 million annually;
--Accelerated debt repayment resulting in gross debt/EBITDA trending below 3x by year-end 2016;
--No material share repurchase activity in 2015 - 2016.
ALLERGAN RATINGS EQUALIZED WITH ACTAVIS RATINGS
The Allergan bonds will receive a downstream guarantee from Actavis plc, but Allergan will not provide an upstream guarantee to any of the other debt in the structure. This guarantee structure is similar that employed in the acquisition of Forest Laboratories, Inc. (Forest Labs) in 2014.
Fitch believes the holders of the Allergan bonds will have a senior claim to the assets and cash flows of Allergan; in the same way holders of Forest Lab's bonds have a senior claim to the assets and cash flows of legacy Forest Labs. But Fitch expects integration activity that combines intellectual property holdings and R&D, sales & marketing, and supply chain functions will make such delineation nearly impossible, resulting in very strong strategic and operational ties in support of equivalent ratings. Furthermore, Fitch expects Actavis will not publish standalone financials for Allergan going forward, as the downstream guarantee appropriately satisfies SEC reporting requirements.
The withdrawal of Allergan's short-term IDR, commercial paper, and senior unsecured bank facility ratings is supported by the termination of those programs at deal close.
Fitch has affirmed Actavis as follows:
Actavis plc
--IDR at 'BBB-'.
Warner Chilcott Limited
--IDR at 'BBB-'.
Actavis Capital S.a r.l.
--Senior unsecured bank facilities at 'BBB-'.
Actavis Funding SCS
--Senior unsecured notes at 'BBB-'.
Actavis WC 2 S.a r.l.
--Senior unsecured bank facility at 'BBB-'.
Actavis, Inc.
--IDR at 'BBB-';
--Senior unsecured notes at 'BBB-'.
Forest Laboratories, Inc.
--IDR at 'BBB-';
--Senior unsecured notes at 'BBB-'.
The Rating Outlook for each IDR is Stable.
Fitch has downgraded Allergan as follows:
--Long-term IDR to 'BBB-' from 'A+';
--Senior unsecured notes to 'BBB-' from 'A+'.
The Ratings have been removed from Rating Watch Negative and a Stable Rating Outlook has been assigned.
Fitch has withdrawn the following ratings of Allergan, Inc.
--Short-term IDR 'F1';
--Commercial paper 'F1';
--Senior unsecured bank facility 'A+'.
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