S&P Places McKesson (MCK) on CreditWatch Negative
Standard & Poor's Ratings Services said today it placed all of its ratings on McKesson Corp. (NYSE: MCK), including the 'A-' corporate credit rating, on CreditWatch with negative implications.
"The CreditWatch placement follows McKesson's announcement that it will acquire Germany-based Celesio AG for $8.3 billion, including the assumption of debt. While financing details have not been made public, leverage could increase to 3.3x if the company funds this transaction with all debt," said credit analyst Michael Berrian. "This level is indicative of "significant" financial risk. In addition to an increase in debt leverage, the acquisition (particularly if financed entirely with debt) could signal a shift in
financial policy and a willingness to operate at a higher level of leverage than our current base case of 1.5x-2x."
We will resolve the CreditWatch listing once financing details emerge. From a business risk standpoint, significant factors that we will be analyzing include the effect of the new business on McKesson's existing competitive position, integration risk, and McKesson's ability to grow this business under its ownership. To determine our final financial risk score, we will take pro forma debt and the combined cash flows available for debt pay down into consideration. Importantly, we will assess financial policy and the willingness to allocate capital to debt reduction rather than additional debt financed acquisitions. Downside risk is likely limited to one notch given our expectation that the company could use combined cash flows to reduce debt and bring financial risk to levels commensurate with "intermediate" financial risk (leverage of 2x-3x) within the next two years.
"The CreditWatch placement follows McKesson's announcement that it will acquire Germany-based Celesio AG for $8.3 billion, including the assumption of debt. While financing details have not been made public, leverage could increase to 3.3x if the company funds this transaction with all debt," said credit analyst Michael Berrian. "This level is indicative of "significant" financial risk. In addition to an increase in debt leverage, the acquisition (particularly if financed entirely with debt) could signal a shift in
financial policy and a willingness to operate at a higher level of leverage than our current base case of 1.5x-2x."
We will resolve the CreditWatch listing once financing details emerge. From a business risk standpoint, significant factors that we will be analyzing include the effect of the new business on McKesson's existing competitive position, integration risk, and McKesson's ability to grow this business under its ownership. To determine our final financial risk score, we will take pro forma debt and the combined cash flows available for debt pay down into consideration. Importantly, we will assess financial policy and the willingness to allocate capital to debt reduction rather than additional debt financed acquisitions. Downside risk is likely limited to one notch given our expectation that the company could use combined cash flows to reduce debt and bring financial risk to levels commensurate with "intermediate" financial risk (leverage of 2x-3x) within the next two years.