OREANDA-NEWS. Fitch Ratings has assigned a 'BBB' rating to Express Scripts Holding Co.'s (NASDAQ: ESRX) new \$7.5 billion bank facility. The Rating Outlook is Stable.

Proceeds will be used to refinance the current bank facility and to fund a \$5.5 billion accelerated share repurchase program. ESRX repaid \$1 billion of notes that matured in February 2015 and is expected to repay \$500 million of notes maturing in September 2015. The new bank facility comprises a five-year \$2 billion revolver, a two-year \$2.5 billion term loan A, and a five-year \$3 billion term loan A.

ESRX's share repurchase and issuance plans are roughly in line with Fitch's forecasts underlying the March 30, 2015 ratings affirmation. No further share repurchases are expected in 2015. Fitch continues to expect that ESRX will target maintenance of gross debt/EBITDA of around 2x.

Fitch expects the majority of 2015 FCF (Fitch forecasts \$4.5 billion) to be used to repay amounts borrowed under the revolver and the two-year term loan. Total debt is expected approximate \$15 billion at Dec. 31, 2015, yielding gross debt/EBITDA of 2.1x.

KEY RATING DRIVERS

Market-Leading Scale: ESRX is the largest pharmacy benefit manager (PBM) and third-largest pharmacy operator in the U.S. Fitch expects such scale to continue enabling ESRX to negotiate favorable purchasing discounts and pricing rebates and to leverage its fixed costs associated especially with mail-order pharmacy.

Robust Cash Flows: Despite relatively low margins, stable and robust cash flows are driven by excellent working capital management and very efficient operations. Strong cash flows and a solid liquidity profile afford good ratings flexibility at current ratings in the event of leveraging M&A.

Historically an Active Acquirer: ESRX has been an active acquirer over the past decade, often employing large debt balances to fund deals. The possibility for large-scale M&A and accompanying leverage spikes, albeit lower now given ESRX's very large size, pressure the ratings somewhat. Notably, the firm has routinely executed on its outlined de-leveraging plans, reducing leverage appropriately within 12-18 months of each deal.

Increasing Competition, Consolidation: ESRX may experience some pricing pressure from new contracts and consolidating clients and competitors, including the announced merger of Catamaran Corp. and UnitedHealth's OptumRx, over the ratings horizon. Current trends supporting consolidation and alignment in many areas of healthcare are expected to continue for the foreseeable future.

Weak N-T, Better L-T Growth: ESRX's 2015 guidance for down to slightly flat adjusted script growth is better than 2014, but still weak. Nevertheless, Fitch believes ESRX's longer-term growth will fare more positively as the firm's leading scale benefits from reform tailwinds, specialty market growth, demographics, and ongoing cost containment efforts by payers leading to growing PBM volumes and utilization of more value-add services.

RATING SENSITIVITIES

ESRX has good flexibility at its current 'BBB' ratings, which contemplate gross debt/EBITDA of around 2x. Flexibility will be somewhat limited for part of 2015 as FCF is used to repay newly issued term loans, but is generally afforded by a robust cash flow profile and steady industry demand.

Positive rating actions could accompany a shift in Fitch's expectations that ESRX would use its ample FCF to reduce its debt load, rather than to fund shareholder payments, such that run-rate gross debt/EBITDA was maintained around 1.5x. Current cash generation is more than sufficient to operate with debt leverage lower than management's 2x target over the ratings horizon.

A downgrade could be driven by the prioritization of cash flows for shareholder-friendly activities over debt repayment in the event of large-scale M&A or operational stress, resulting in debt leverage materially and durably above 2x. A possible stress scenario envisions the possibility of prolonged negative underlying script growth, possibly due to additional customer losses more severe than Fitch currently expects.

KEY ASSUMPTIONS

--Relatively flat script and top-line growth in 2015, with modest positive growth in 2016;
--Modest EBITDA margin expansion in 2015, resulting from gross margin compression offset by decreasing SG&A;
--Total debt of \$18 billion, pro forma for the new bank facility, trending to \$15 billion by year-end 2015. Generally steady debt levels on modestly growing EBITDA resulting in gross debt/EBITDA around 2.0x over the forecast period;
--Strong FCF of around \$4.5 billion in 2015, mostly directed toward the repayment of the new term loans and revolver borrowings used to fund the \$5.5 billion ASR program. FCF used for shareholder payouts over debt repayment, in lieu of strategic M&A, over the forecast period.

Fitch rates ESRX as follows:

Express Scripts Holding Company
--Long-term IDR 'BBB';
--Unsecured bank facility 'BBB';
--Unsecured notes 'BBB'.

Express Scripts, Inc.
--Long-term IDR 'BBB';
--Unsecured notes 'BBB'.

Medco Health Solutions, Inc.
--Long-term IDR 'BBB';
--Unsecured notes 'BBB'.

The Rating Outlook is Stable.