S&P Maintains Baxter (BAX) on CreditWatch Negative Amid Asset Spinoff; Business Risk Remains 'Strong'

Standard & Poor's Ratings Services said its ratings on Baxter (NYSE: BAX), including the 'A-' corporate credit rating, remain on CreditWatch, where they were placed with negative implications on March 27, 2014.

Although the spin-off will result in a significantly smaller, less-diversified, and lower-EBITDA-margin business for Baxter, we continue to assess Baxter's business risk as "strong".

As part of the spin-off, we expect Baxter to retire the majority of the approximately $10 billion of debt currently outstanding, using proceeds of the debt being raised at the Baxalta subsidiary and distributed as a dividend to Baxter, and by monetizing Baxter's retained equity stake of about 20% of Baxalta, over the next year or two. We estimate adjusted net debt leverage of 2.4x for 2015 (pro forma) will decline to about 1.7x in 2016 and 2017. (We haircut cash at the not-yet-monetized value of the equity stake by 25%). Our assessment of financial risk as "modest" reflects these credit metrics, and our expectation that the company will generally maintain adjusted net debt leverage below 2x. We also take into consideration the impact of relatively high levels of capital expenditures on cash flow over the next few years.

"We expect to affirm the 'A-' corporate credit rating and issue-level ratings if the transaction is consummated as expected, though we expect to assign a negative outlook to reflect downside risk to our base case of debt leverage declining to below 2x and free cash flow improving within two years," said Standard & Poor's credit analyst David Kaplan. The potential for a material decline in the value of the retained equity stake in Baxalta ahead of its monetization adds incremental risk to our base case.

We expect to resolve the CreditWatch placement in coming months upon the consummation of the transaction. We now expect to the corporate credit rating and the issue-level ratings to remain 'A-' if the transaction is consummated as expected.

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