S&P Lowers Baxter (BAX) to 'A-'; Places on CreditWatch Negative
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Standard & Poor's Ratings Services lowered its corporate credit rating and the unsecured debt ratings of Baxter International Inc. to 'A-' from 'A', and placed these ratings on CreditWatch with negative implications. We also lowered the company's short-term rating to 'A-2' from 'A-1'.
The lower rating follows the announcement that Baxter plans to spin-off its biopharmaceuticals businesses into a new company. Baxter's operations after the separation would include the businesses in its Medical product segment (including the fluid systems business, the renal business, the biopharma solutions business, and the specialty pharmaceuticals business) and the biosurgery business.
"The transaction, if successfully completed, would result in a significantly smaller, less diversified, and lower EBITDA margin business for Baxter," said Standard & Poor's credit analyst David Kaplan. "We estimate that the businesses being retained at Baxter account for the majority of revenues but only about 40% of EBITDA."
The CreditWatch placement reflects Standard & Poor's uncertainty around the final capital structure of the new Baxter. If cash, debt, and debt-like obligations are allocated such that financial risk is unchanged following the spin-off, downgrade potential from 'A-' is likely limited to one notch. If Baxter retains a higher portion of the liabilities, or retains less cash, such that adjusted debt leverage increases, we could consider a multiple-notch downgrade.
We expect to resolve the CreditWatch placement when Baxter provides more details relating to the capital structure at the new Baxter, and clarifies its financial policy and profitability, pro forma for the spin-off, including the effect of negative synergies.
The lower rating follows the announcement that Baxter plans to spin-off its biopharmaceuticals businesses into a new company. Baxter's operations after the separation would include the businesses in its Medical product segment (including the fluid systems business, the renal business, the biopharma solutions business, and the specialty pharmaceuticals business) and the biosurgery business.
"The transaction, if successfully completed, would result in a significantly smaller, less diversified, and lower EBITDA margin business for Baxter," said Standard & Poor's credit analyst David Kaplan. "We estimate that the businesses being retained at Baxter account for the majority of revenues but only about 40% of EBITDA."
The CreditWatch placement reflects Standard & Poor's uncertainty around the final capital structure of the new Baxter. If cash, debt, and debt-like obligations are allocated such that financial risk is unchanged following the spin-off, downgrade potential from 'A-' is likely limited to one notch. If Baxter retains a higher portion of the liabilities, or retains less cash, such that adjusted debt leverage increases, we could consider a multiple-notch downgrade.
We expect to resolve the CreditWatch placement when Baxter provides more details relating to the capital structure at the new Baxter, and clarifies its financial policy and profitability, pro forma for the spin-off, including the effect of negative synergies.
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