Moody's Rates Walgreens Boots Alliance (WAG) Commercial Paper Program at 'Prime-2 Commercial Paper'

Moody's Investors Service today assigned a Prime-2 Commercial Paper rating to Walgreens Boots Alliance, Inc. (NYSE: WAG)("WBA") $3 billion commercial paper program. WBA existing senior unsecured notes rating of Baa2 is affirmed. At the same time, Moody's affirmed Walgreen Co. senior unsecured notes rating at Baa2 and $2.25 billion commercial paper program at Prime-2. The rating outlook remains stable. The rating is being assigned as a part of Walgreen Co.'s acquisition of the remaining 55% equity of Alliance Boots.

WBA's Prime-2 commercial paper rating reflects its Baa2 long term senior unsecured rating, its good liquidity profile, and Moody's expectation that WBA will maintain sufficient availability at all times under its $3 billion revolving credit facility which back stops its commercial paper borrowings. WBA has a diversified bank group and the revolving credit facility includes a same day funding option.

At August 31, 2014, Walgreen Co. had $2.6 billion of cash and short term investments. At May 31, 2014, period Alliance Boots had about $700 million of cash. Pro forma for the closing of the acquisition, at August 31, 2014 WBA had $2.1 billion of cash. Over the next twelve months we expect WBA to generate enough cash flow to support capital spending and its ordinary dividend. We anticipate its excess cash flow along will further debt issuance will be used to repurchase common shares under its $3 billion share repurchase authorization. The company currently has a $2.25 billion multi-year credit facility that automatically increases to $3 billion upon shareholder approval of the issuance of the common shares to acquire the remaining 55% of Alliance Boots. A special meeting of shareholders has been set for December 29, 2014. WBA's revovling credit facility expires in November 2019. It contains one financial covenant, debt to capitalization. We anticipate WBA will have a healthy cushion to meet this covenant.

Upon closing of the acquisition of the remaining equity of Alliance Boots, WBA will become the parent company with a direct wholly owned subsidiary Walgreen Co. and an indirect wholly owned subsidiary Alliance Boots GmbH. WBA anticipates issuing about $2 billion in commercial paper which along with its senior unsecured notes, term loan, and excess cash will be used to fund the cash consideration to acquire the remaining equity of Alliance Boots, to refinance substantially all of Alliance Boots existing debt, and to pay related fees and expenses.

The following rating is assigned:

Commercial Paper rating at Prime-2

The following ratings are affirmed:

For Walgreens Boots Alliance, Inc.:

Senior unsecured notes at Baa2

For Walgreen Co.:

Senior unsecured notes at Baa2

Commercial Paper at Prime-2

RATINGS RATIONALE

WBA's senior unsecured rating reflects its strong market position of three of its businesses. Walgreen, the largest drug store operator in the United States; Boots, the United Kingdom's largest drugstore retailer; and Alliance Healthcare, a leading European pharmaceutical wholesaler. Moody's views WBA's Farmacia Ahumada business as having a weaker competitive position with Farmacias Benavides being the third largest retail pharmacy chain in Mexico and Farmacias Ahumada being one of the three largest retail pharmacy chains in Chile. The rating is also reflective of the ten year contract with AmerisourceBergen which should benefit earnings over the long term. We believe the enhanced scalability of the Amerisource Bergen partnership will create further purchasing power.

The rating also indicates Moody's favorable view of the drugstore industry. Moody's believes the drugstore industry will benefit from the aging of the U.S., U.K., and European populations which will likely drive increasing use of prescription drugs over the long term. Moody's also believes the demand for prescription drug medication is somewhat resilient to recessionary pressures. However, Moody's views negatively that the Mexican economy has been struggling with weak growth.

The rating is constrained by WBA's debt to EBITDA which will remain high for the Baa2 rating for twelve to eighteen months following the close of the acquisition. Moody's anticipates that upon closing of the transaction WBA will have about $18 billion in debt. However, its debt level will likely increase again in 2015 in order for WBA to fund the $3 billion share repurchase authorization. Moody's estimates that WBA's debt levels will peak at close to $19 billion.

Moody's anticipates that WBA's debt to EBITDA will not return to levels indicative of the Baa2 rating until after August 2016. Pro forma for the acquisition debt to EBITDA will be 4.3 times and will remain about 4.3 times after the share repurchase program. Moody's believes leverage will improve starting in 2016 as Moody's expects WBA to repay about $2.0 to $2.3 billion in debt in 2016, bringing debt to EBITDA to between 3.75 times and 4.0 times by the end of fiscal 2016. Moody's anticipates that WBA will make about $2 billion in additional debt repayments in 2017 such that its debt to EBITDA will remain below 3.75 times going forward.

The rating is also constrained by our view that margins will remain pressured by reimbursement rates worldwide, competition in the European wholesale market, and selective generic drug price inflation.

The stable outlook acknowledges Moody's expectation that the acquisition and integration of Alliance Boots will go smoothly. It also reflects Moody's belief that the global platform of WBA will result in sizable purchasing synergies. The stable outlook also acknowledges that Moody's expects WBA's debt to EBITDA will improve to below 3.75 times by fiscal 2017.

Downward rating pressure would develop should WBA pursue any further debt financed shareholder activities (beyond the current $3 billion share repurchase program) or acquisitions. Ratings could be downgraded should WBA's operating performance falter or should the combined entity be unable to substantially reduce its debt levels over the twelve to eighteen month period following the close of the transaction such that debt to EBITDA does not approach 3.75 times by the fiscal year ended August 2016. Ratings could also be downgraded should WBA choose to maintain debt to EBITDA over 3.75 times over the longer term or should EBITA to interest expense fall below 4.75 times.

Given the recent downgrade and the weakness in credit metrics after the remaining equity stake in Alliance Boots is acquired, an upgrade is unlikely at the present time. Over the longer term ratings could be upgraded should WBA's operating performance improve and debt be reduced such that debt to EBITDA falls to 3.25 times or below and should EBITA to interest expense remain above 5.5 times. An upgrade would also require WBA to maintain a financial policy that supports credit metrics remaining at this levels.

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