Fitch Places Baxter International's Long-Term & Short-Term IDRs 'A'/'F1' on Negative Watch

CHICAGO--()--Fitch Ratings has placed Baxter International Inc.'s (Baxter; NYSE: BAX) long-term and short-term ratings on Negative Watch, following its announced agreement to acquire Gambro AB (Gambro). Fitch expects to resolve the Watch upon completion of the transaction and believes a one-notch downgrade is likely. A full list of the ratings follows at the end of this press release.

The rating action reflects the following factors:

--The anticipated acquisition of Gambro AB will significantly increase leverage in the intermediate term, while enhancing the offering and scale of Baxter's renal business.

--Fitch notes that Baxter will have no headroom in the single-A rating category post acquisition, given that expected leverage (total debt /operating EBITDA) following the Gambro acquisition will exceed 2.0x.

--Fitch projects that the increased capital expenditure requirements to construct the Georgia plasma fractionation facility will weigh on free cash flow (FCF) through 2015.

--Fitch believes BAX will balance the negative effect on cash from the recent step-up in dividend payments with adjustments to share repurchases in order to improve its financial profile.

--Fitch expects BAX will continue to generate stable operating performance in the face of general economic headwinds, owing to its diversity of products, many of which are life sustaining.

--Fitch forecasts that the company will generate positive FCF (cash from operations less capital expenditures and dividends) of at least $500 million annually through 2015, in light of the aforementioned cash deployment plans and expected stable operating performance.

--Fitch believes that BAX will maintain adequate liquidity and market access to fund internal investment, dividends and targeted acquisitions.

GAMBRO ACQUISITION STRATEGICALLY SOUND

BAX announced its intention to acquire Gambro AB for approximately $4 billion from private owners. Fitch believes the proposed acquisition is strategically sound, given BAX's operating experience in hemodialysis and peritoneal dialysis. The Gambro acquisition will enable BAX to expand both its renal portfolio (particularly in hemodialysis) offering and its geographic reach. Baxter will likely achieve meaningful cost ($300 million) and revenue synergies. The transaction is expected to close in the first-half of 2013.

INTERMEDIATE-TERM LEVERAGE TO REMAIN HIGH

Baxter intends to fund the acquisition with approximately $1 billion of international cash balances and $3 billion in new debt issuance. Fitch expects post-acquisition leverage will remain between 1.5x - 2.1x for at least 24 months, which is inconsistent with an 'A' credit rating for Baxter. However, Fitch believes Baxter will reduce leverage to roughly 1.5x by year-end 2015 by increasing profitability and paying down about $1 billion in debt.

CONTINUED OPERATIONAL STABILITY

Fitch expects BAX to generate 3% - 5% organic growth in nearly all of its business segments through 2013, despite a challenging economic environment. While demand for the company's products is relatively reliable, revenues are modestly sensitive to the macroeconomic environment through reimbursement rates and, to a lesser extent, utilization. Fitch expects that the Baxter's continued progress in commercializing pipeline products will also provide support for longer-term growth and margin stability.

POSITIVE BUT LOWER FCF IN INTERMEDIATE TERM

Fitch expects that BAX will generate more than $3.0 billion in cash flow from operations during 2013, with continued increases in the longer term. Operational cash flow in 2013 should be sufficient to fund approximately $1.6 billion - $1.7 billion of capital expenditures, roughly $1 billion of dividends, and $300 million of share repurchases.

ACQUISITIVE POSTURE TO PERSIST

Fitch expects targeted acquisitions will remain a core element of Baxter's long-term growth strategy, using cash balances and incremental debt to fund future transactions. Fitch believes the company will focus on platforms that provide enhancements or adjacencies to its existing portfolio. However, Baxter's flexibility within the single-A rating category to pursue leveraging acquisitions will be constrained during the next 2 - 3 years.

SIGNIFICANT INTERNATIONAL PRESENCE AND IMPLICATIONS

BAX generates roughly 59% of its business internationally, and its geographic mix presents certain issues:

--Any adverse changes in tax policy toward international earnings could affect the company's cash flow.

--Foreign exchange rate fluctuations can benefit or impede revenues, income and cash flow, despite the company's natural and synthetic hedges.

--BAX's relatively smaller exposure to the U.S. market helps to mitigate some of the costs associated with the U.S. healthcare reform legislation passed in 2010.

ADEQUATE LIQUIDITY AND MANAGEABLE LEVERAGE/DEBT MATURITIES

FCF for the latest 12 months (LTM) ended Sept. 30, 2012 was approximately $1.24 billion. At Sept. 30, 2012, cash on hand was $3.19 billion, and BAX had no borrowings on its $1.5 billion credit facility maturing in 2015 and full availability of its $435 million credit facility maturing in 2013. Total debt was roughly $5.95 billion, and resulting leverage was 1.61x. The company has approximately $300 million of long-term debt maturing in 2013, $350 million in 2014, $860 million in 2015, $600 million in 2016 and $500 million in 2017.

WHAT COULD TRIGGER A RATING ACTION

With forecasted near-term debt-to-EBITDA of 2.1x - 2.3x (post Gambro acquisition), Baxter will have no headroom in the single-A category. Therefore, Fitch does not anticipate a positive rating action for Baxter in the near term.

A one-notch downgrade is likely upon the completion of the Gambro acquisition, funded in part with $3 billion of additional debt. Resulting leverage is expected to persist above 1.6x for more than 18 months.

Further negative rating actions could result from the following:

--Baxter is unable to successfully integrate Gambro and does not realize the forecasted $300 million in cost synergies by 2016;

--Baxter does not reduce leverage below 2.0x within 18-24 months of the Gambro acquisition;

--Material and lasting deterioration in operations and operational and FCF relative to Fitch's forecasts.

RATING ACTIONS

Fitch has placed Baxter's following ratings on Negative Watch:

--Long-term IDR 'A';

--Short-term IDR 'F1';

--Senior unsecured notes 'A';

--Bank credit facility 'A';

--Commercial paper 'F1'.

Fitch has placed Baxter Holding B.V.'s following ratings on Negative Watch:

--Long-term IDR 'A';

--Short-term IDR 'F1'.

Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.

Applicable Criteria and Related Research:

--'Corporate Rating Methodology' (Aug. 8, 2012).

Applicable Criteria and Related Research:

Corporate Rating Methodology

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=684460

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Contacts

Fitch Ratings
Primary Analyst
Bob Kirby, CFA, +1-312-368-3147
Director
Fitch, Inc.
70 W. Madison Street
Chicago, IL 60602
or
Secondary Analyst
Michael Zbinovec, +1-312-368-3164
Senior Director
or
Committee Chairperson
Michael Weaver, +1-312-368-3156
Managing Director
or
Media Relations
Brian Bertsch, New York, +1 212-908-0549
brian.bertsch@fitchratings.com

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Contacts

Fitch Ratings
Primary Analyst
Bob Kirby, CFA, +1-312-368-3147
Director
Fitch, Inc.
70 W. Madison Street
Chicago, IL 60602
or
Secondary Analyst
Michael Zbinovec, +1-312-368-3164
Senior Director
or
Committee Chairperson
Michael Weaver, +1-312-368-3156
Managing Director
or
Media Relations
Brian Bertsch, New York, +1 212-908-0549
brian.bertsch@fitchratings.com