Moody's Lowers Outlook on Baxter (BAX) to Negative Following Split Plans
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Price: $23.50 +0.56%
Overall Analyst Rating:
SELL (= Flat)
Dividend Yield: 0.2%
EPS Growth %: -24.6%
Overall Analyst Rating:
SELL (= Flat)
Dividend Yield: 0.2%
EPS Growth %: -24.6%
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Moody's Investors Service changed Baxter International Inc's (NYSE: BAX) rating outlook to negative from stable following the company's announcement that it plans to pursue a separation of its bioscience business into an independent public company. At the same time, Moody's affirmed Baxter's A3 and Prime-2 ratings.
Ratings affirmed:
Baxter International, Inc.
A3 senior unsecured notes
(P)A3 senior unsecured shelf
Prime-2 short term rating
RATINGS RATIONALE
The change to a negative outlook reflects Moody's belief that Baxter's separation of its bioscience division would be a material event, especially in light of the degree to which bioscience currently contributes to Baxter's sales and profitability. Although Baxter's medical division's growth will benefit from the recent Gambro acquisition, many of Baxter's key pipeline products are in its bioscience area.
"The separation will cause Baxter to lose scale, a higher margin business, as well as segment diversity, all of which are currently key credit strengths," said Diana Lee, a Moody's Senior Credit Officer.
At this time, Baxter expects the separation to occur in mid-2015. There are several key unknowns concerning the transaction, including: (1) how much debt will remain at the existing Baxter entity; (2) whether financial policies -- including shareholder initiatives, acquisition plans, and deleveraging plans -- will change post-separation; and (3) the cash flow capability of the remaining Baxter entity post-separation.
Baxter's current A3 rating is supported by its relatively large size as well as its broad product offerings focused on critical care medical needs, which help to insulate it from the effects of economic downturns. Baxter's key bioscience division, which generates over half of its profitability, will experience moderate growth over the near term. Over time, however, sales should increase as Baxter introduces new products and expands the use of its existing products for different treatment indications. While leverage rose following closure of the 2013 Gambro transaction, Moody's expects synergies and the strength of its base business to help Baxter to deleverage. By becoming a full-service manufacturer of both hemodialysis (HD) and peritoneal dialysis (PD) products -- similar to other players in this space -- Baxter should have better success at bidding on business outside of the US.
The negative outlook reflects Moody's belief that post-separation, Baxter's smaller size and less diverse businesses could well result in a credit profile that is no longer sufficient to maintain its A3 rating. A rating downgrade could occur depending upon the final capital structure, as well as the financial policies and business profile of the remaining company. Additionally, if Moody's believes that debt/EBITDA will be sustained above 1.75 times, the ratings could be downgraded. Although Moody's does not anticipate an upgrade especially given the planned separation, over time, an upgrade could occur depending upon the long-term capital structure, financial policies and business profile of the remaining company. Also, if Moody's believes that Baxter could sustain debt/EBITDA below 1.5 times, the ratings could be upgraded.
The principal methodology used in this rating was Global Medical Product and Device Industry published in October 2012. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.
Ratings affirmed:
Baxter International, Inc.
A3 senior unsecured notes
(P)A3 senior unsecured shelf
Prime-2 short term rating
RATINGS RATIONALE
The change to a negative outlook reflects Moody's belief that Baxter's separation of its bioscience division would be a material event, especially in light of the degree to which bioscience currently contributes to Baxter's sales and profitability. Although Baxter's medical division's growth will benefit from the recent Gambro acquisition, many of Baxter's key pipeline products are in its bioscience area.
"The separation will cause Baxter to lose scale, a higher margin business, as well as segment diversity, all of which are currently key credit strengths," said Diana Lee, a Moody's Senior Credit Officer.
At this time, Baxter expects the separation to occur in mid-2015. There are several key unknowns concerning the transaction, including: (1) how much debt will remain at the existing Baxter entity; (2) whether financial policies -- including shareholder initiatives, acquisition plans, and deleveraging plans -- will change post-separation; and (3) the cash flow capability of the remaining Baxter entity post-separation.
Baxter's current A3 rating is supported by its relatively large size as well as its broad product offerings focused on critical care medical needs, which help to insulate it from the effects of economic downturns. Baxter's key bioscience division, which generates over half of its profitability, will experience moderate growth over the near term. Over time, however, sales should increase as Baxter introduces new products and expands the use of its existing products for different treatment indications. While leverage rose following closure of the 2013 Gambro transaction, Moody's expects synergies and the strength of its base business to help Baxter to deleverage. By becoming a full-service manufacturer of both hemodialysis (HD) and peritoneal dialysis (PD) products -- similar to other players in this space -- Baxter should have better success at bidding on business outside of the US.
The negative outlook reflects Moody's belief that post-separation, Baxter's smaller size and less diverse businesses could well result in a credit profile that is no longer sufficient to maintain its A3 rating. A rating downgrade could occur depending upon the final capital structure, as well as the financial policies and business profile of the remaining company. Additionally, if Moody's believes that debt/EBITDA will be sustained above 1.75 times, the ratings could be downgraded. Although Moody's does not anticipate an upgrade especially given the planned separation, over time, an upgrade could occur depending upon the long-term capital structure, financial policies and business profile of the remaining company. Also, if Moody's believes that Baxter could sustain debt/EBITDA below 1.5 times, the ratings could be upgraded.
The principal methodology used in this rating was Global Medical Product and Device Industry published in October 2012. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.
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