Mead Johnson Nutrition Co. (MJN) S&P Raises Mead Johnson to 'BBB+'; Cites 'Satisfactory' Business Profile Apr 23, 2014 09:49AM

Standard & Poor's Ratings Services said yesterday it raised its rating on Glenview, Ill.-based pediatric nutrition company Mead Johnson Nutrition Co. (NYSEL MJN) by one notch to 'BBB+' from 'BBB'. The outlook is stable. 

At the same time, we raised our senior unsecured debt rating on Mead Johnson's senior unsecured notes to 'BBB' from 'BBB-'. This rating is one notch below our 'BBB+' corporate credit rating on the company, reflecting our opinion that this debt is structurally subordinated to priority obligations at its operating entities. The operating entities generate almost all of the company's cash flow and account for the majority of total assets, but do not guarantee this debt.

At Dec. 31, 2013, Mead Johnson had approximately $1.52 billion of total debt outstanding.

The ratings on Mead Johnson reflect our assessment of the company's "satisfactory" business risk profile and "minimal" financial risk profile. "We revised our view of the company's financial risk profile to 'minimal' from 'modest' to reflect continued improvement in its credit measures," said Standard & Poor's credit analyst Jeff Burian. "Despite recent high ingredient costs and challenging conditions in some of its markets, we expect the company to sustain its low leverage and substantial cash flow."

Standard & Poor's "satisfactory" business risk assessment reflects the company's product and brand concentration, yet substantial market positions, well-recognized brand name, and the geographic diversity of its sales. Despite its relatively narrow product focus, Mead Johnson has strong market positions, including the No. 2 global position within infant formula (which accounted for about 59% of 2013 net revenue) and No. 3 global position in children's nutrition products (about 39% of 2013 net revenue).

The stable outlook reflects our expectations that Mead Johnson will continue to generate substantial cash flows from operations and maintain strong liquidity, while funding its dividends and share repurchases.


Moody's Doesn't See Expected Price Increases by Netflix (NFLX) Impacting Ratings, Outlook Apr 22, 2014 02:53PM

Moody's Investors Service said that Netflix, Inc.'s (Nasdaq: NFLX) announcement to increase subscription prices will not impact its Ba3 Corporate Family rating and positive rating outlook. Netflix announced that it plans to increase subscription prices by one or two dollars later in the quarter. The global price increase will impact new members initially and existing members will stay at current rates for a generous time period before eventually being impacted by the price increase. The move is not expected to have a material impact on subscriber churn rates as we believe this time the company is being particularly cautious in its approach by implementing a modest price adjustment and delaying rate increases for existing customers. However, we believe that new subscribers may want to take advantage of current pricing levels and be grandfathered in at lower rates. Accordingly we believe that the company could likely experience a moderate increase in new subscriptions over the coming month. Looking ahead, we anticipate the planned price hike will positively impact EBITDA and free cash flows over the long run and allow the company greater flexibility to invest in high quality content offerings.

Moody's also indicated that the company's 2014 first quarter earnings are in line with expectations factored into its current ratings and the positive rating outlook. Netflix reported a boost in top-line with year over year revenues up 24%, helped by a 9% sequential growth in its subscriber base, which stood at 48 million (international plus domestic streaming subscribers) at 3/31/2014. Driven by good execution and a 21% sequential increase in international subscribers (paid), the company demonstrated remarkable progress in stabilizing its international segment operations and curtailing international startup losses, which improved by over 50% on a year over year basis. Based on the company's solid Q1 results and expectations for continued growth momentum in the remainder of the year, Moody's anticipates that over the coming quarters, Netflix stands to position itself more solidly in the Ba rating category and move towards credit metrics that are indicative of a higher rating.

The positive outlook is supported by our belief that continued operating improvements will enable the company to reduce consolidated debt-to-EBITDA leverage from approximately 3.0x at 3/31/2014 (incorporating Moody's standard adjustments) to under 2.0x within the next 18 months. Notably, LTM 3/31/2014 EBITDA has surpassed 2010 levels (when the company was rated Ba2 and was a pure physical DVD rental business), driven by consistent growth in streaming subscribers, increased investments in premium content and original programming like House of Cards and Orange is the New Black and successful launches in international markets. Netflix's ongoing international expansion will continue to create a drag on earnings and cash flows over the coming years, but we expect that growth and maturing of early entry markets will offset some of the negative impact of new market launches. Overall, we believe that favorable operating trends seen thus far will continue over the near to intermediate term and nullify the concerns over the higher breakeven subscriber levels needed for the streaming business.


Moody's Moves Outlook on Valeant Pharma (VRX) to 'Developing'; Affirms Existing Ratings (AGN) Apr 22, 2014 02:46PM

Moody's Investors Service revised the rating outlook on Valeant Pharmaceuticals International, Inc. (NYSE: VRX) to developing from negative. At the same time, Moody's affirmed Valeant's existing ratings including the Ba3 Corporate Family Rating, Ba3-PD Probability of Default Rating, Ba1 senior secured rating and B1 senior unsecured rating.

This rating action follows the announcement that Valeant has made an offer to purchase Allergan, Inc. (NYSE: AGN) for over $40 billion with a combination of cash and stock. To date, Allergan has not accepted Valeant's offer.

The developing outlook represents the potential for an improving credit profile if Valeant acquires Allergan, based on significantly improved scale, leadership positions in eyecare and dermatology, significant cash flow, and potentially a reduction in Valeant's debt/EBITDA. The likelihood of acquiring Allergan is difficult to predict, and the specific terms could change. In a scenario where it does not occur, Valeant's aggressive acquisition strategy will still be a key factor constraining the rating.

Ratings affirmed:

Valeant Pharmaceuticals International, Inc.:

Ba3 Corporate Family Rating

Ba3-PD Probability of Default Rating

Ba1 (LGD2, 20%) senior secured term loans and revolving credit agreement

B1 (LGD5, 76%) senior unsecured notes

SGL-1 Speculative Grade Liquidity Rating

Valeant Pharmaceuticals International:

B1 (LGD5, 76%) senior unsecured notes

RATINGS RATIONALE

Valeant's Ba3 Corporate Family Rating reflects its high pro forma leverage, in excess of 4.0 times (using Moody's adjustments) as of December 31, 2013, prior to assessing the impact of an acquisition of Allergan. The rating also reflects the risks associated with an aggressive acquisition strategy, including integration risks and rapid capital structure changes. Pro forma leverage includes estimated acquisition synergies from recent acquisitions including Bausch & Lomb, but the company's rapid pace of acquisitions makes it difficult to ascertain a true run-rate of pro forma EBITDA. The ratings are supported by Valeant's considerable scale, a high level of product and geographic diversity, a successful acquisition track record, and the lack of any major patent cliffs. Good free cash flow will continue, although acquisitions will remain a use of cash.

The rating outlook is developing, pending clarity on the likelihood of Valeant acquiring Allergan, which would be credit-positive. Valeant's ratings could be upgraded if Moody's believes debt/EBITDA will be sustained below 3.5 times (with credit for reasonable synergies) while maintaining good organic growth rates. Conversely, Valeant's ratings could be downgraded if Moody's believe debt/EBITDA will be sustained materially above 4.0 times or if other risk factors emerge, such as litigation or regulatory compliance issues.


S&P Keeps Sysco Corp. (SYY) on CreditWatch Negative; Proposed Merger Still Under Regulatory Review Apr 22, 2014 11:51AM

Standard & Poor's Ratings Services said that all of its ratings on Houston-based Sysco Corp., (NYSE: SYY) including our 'A' corporate credit and 'A-1' short-term rating, remain on CreditWatch, where we placed them with negative implications on Dec. 9, 2013. Total debt outstanding as of Dec. 28, 2013, was approximately $3.2 billion.

Our ratings on Rosemont, Ill.-based US Foods Inc., including our 'B' corporate credit rating, remain on CreditWatch with positive implications.

Our ratings on Sysco remain on CreditWatch with negative implications as its proposed merger with US Foods remains subject to regulatory review. Assuming regulators approve the transaction, it should close in the third-calendar quarter of 2014.

Assuming the transaction closes on terms generally consistent with those the company expects, including its projected debt levels and with limited divestitures, we anticipate lowering our corporate credit and short-term ratings on Sysco to 'A-' and 'A-2', respectively. This would reflect our expectation that the company will maintain a "strong" business risk profile given its substantial scale, increased bargaining power, and potential for meaningful operational synergies. It also reflects our expectation that within about two years following the close, the company will reduce debt, grow profitability, and improve and maintain credit ratios to levels generally consistent with an "intermediate" financial risk profile, the indicative ratios for which include 2x-3x leverage and 30%-45% funds from operations (FFO) to total debt.

If we lowered the corporate credit rating on Sysco to 'A-' we would assign a negative rating outlook. This would reflect operational and integration risks to Sysco, including the potential for net synergies to fall short of our expectations, and customer defections to exceed the level we have assumed.

We would reevaluate the CreditWatch listing and ratings if regulators do not approve the transaction, or if as a condition of approval regulators require significant changes to the proposed transaction, including substantial divestitures; if the transaction financing structure is materially revised; or if the operating environment changes significantly from current conditions.


S&P Lowers Outlook on MoneyGram (MGI) to Negative; Cites Wal-mart's New Money-Transfer Service Apr 21, 2014 02:51PM

Standard & Poor's Ratings Services said today that it revised its outlook on MoneyGram International (Nasdaq: MGI) to negative from stable. At the same time, we affirmed our issuer credit rating and senior secured issue rating at 'BB-'.

Wal-Mart has reached an agreement with Ria Financial Services, a subsidiary of Euronet Worldwide Inc., to provide Wal-Mart-to-Wal-Mart U.S.-only money transfers at more than 4,000 of its stores at a cost below MoneyGram's existing Wal-Mart prices.

"We believe that the new service, which will become available April 24, will directly affect MoneyGram's U.S. Wal-Mart-to-Wal-Mart money transfer business, which represents about 13% of MoneyGram's total company revenue," said Standard & Poor's credit analyst Igor Koyfman. When Wal-Mart commissions are deducted, it will result in about a 9% reduction to gross profit. (We note that this new agreement with Ria does not affect MoneyGram's U.S.-to-international money transfer services.)

Wal-Mart-related transactions represented about 26% of MoneyGram's total revenue during the fourth quarter of 2013. Accounting for Wal-Mart's new offering, we expect that Wal-Mart will still contribute about 10%-15% of MoneyGram's total revenue--a large portion of which will be U.S. to international--over the next two years. This level of agent-client concentration is a risk because if the relationship was discontinued, it would hurt the company's financial results. We also believe that large agents can constrain profits by influencing product pricing or demanding additional financial concessions. At this point, MoneyGram stated that it won't lower pricing at its Wal-Mart locations. It remains unclear if MoneyGram will take future pricing actions at the remainder of its 31,000 U.S. agents.

The negative outlook reflects an increasingly competitive money transfer industry, which we believe could counteract any material benefit in earnings that relate to moderate improvements in the global economy and an increase in MoneyGram's global agent locations. The new competitive environment creates uncertainty over the next 12 months in terms of MoneyGram's market share, profitability, and cash flow.

We could lower our ratings on MoneyGram if its leverage exceeds 4.5x on a sustained basis. In our view, this could occur if financial performance deteriorates beyond our expectations as a result of competition, the company incurs higher-than-expected compliance costs, or it issues additional debt to finance a payout to shareholders. (We adjust EBITDA for nonrecurring items and debt for noncancellable operating leases and unfunded postretirement benefits.)

We could affirm the ratings and assign a stable outlook if we believe that the company will sustain leverage below 4.5x. Over the next 12 months we will continue to review the company's financial performance in light of the lower-priced money transfers offered by Ria at Wal-Mart. We could also upgrade MoneyGram if THL's and Goldman Sachs's future exit strategy doesn't result in significantly higher leverage and the company sustains leverage below 3x.


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