Fitch Rates CareFusion's Proposed $1B Bond Offering 'BBB'; Outlook Stable

CHICAGO--()--Fitch Ratings has assigned a 'BBB' rating to CareFusion Corp.'s (NYSE: CFN) proposed $1 billion senior unsecured bond issuance. Proceeds from the issuance are expected to be used for general corporate purposes, including the repayment of CFN's $450 million of unsecured bonds due August 2014.

CFN's Issuer Default Rating (IDR) is 'BBB', with a Stable Outlook. A full list of ratings for CFN follows at the end of this release.

The issuance will constrain CFN's ratings flexibility somewhat in the near term, as Fitch estimates that pro forma debt-to-EBITDA will approximate 2.3x. Debt-to-EBITDA at March 31, 2014 was 1.7x. Fitch continues to believe CFN will operate with debt leverage of around 2x over the ratings horizon, which is consistent with the current 'BBB' ratings.

Top-line growth and profitability have been dampened during fiscal 2014; but cash flows remain strong and steady, in support of the 'BBB' ratings. Fitch expects improving growth and profitability over the next several quarters to further support the firm's solid cash flow profile and to drive modest de-leveraging in the near- to intermediate-term. Fitch also notes that proceeds from the issuance will provide CFN with additional available liquidity with which to consummate medium-sized M&A.

The notes will rank pari passu with all currently existing unsecured debt and include a change of control repurchase provision (at 101%) upon both a change of control and subsequent downgrade of the notes to non-investment grade. Change of control triggers are generally customary.

KEY RATING DRIVERS

-- CFN maintains a steady operating profile despite a generally pressured hospital capital spending environment, driven by strong market shares and largely recurring cash flows.

-- Pro forma debt leverage will be somewhat elevated relative to CFN's 'BBB' ratings subsequent to the proposed issuance. However, a solid cash flow profile and Fitch's expectation for improving growth and profitability over the next several quarters offset this concern.

-- CFN has relatively limited international exposure, thereby restricting growth potential, albeit improved with the acquisitions of Vital Signs and a 40% stake in Ceasarea Medical Electronics. Fitch expects CFN to continue to responsibly pursue non-U.S. acquisition targets in calendar 2014-2015.

-- Liquidity is sufficient, particularly considering incremental cash on hand from the proceeds of the proposed issuance, to facilitate medium-sized M&A over the ratings horizon.

RATING SENSITIVITIES

Maintenance of a 'BBB' IDR will require debt leverage generally maintained around or below 2x, accompanied by stable cash flows and steady profit margins. Temporary increases in leverage above this range could be appropriate to consummate strategic M&A.

An upgrade could be driven by durable margin expansion with improved top-line growth, indicating an improvement in the hospital capital spending environment and the successful installation of what has become a significant order backlog, according to management. Robust cash flows and debt leverage expected to be sustained near or below 1.6x will be required to support an upgrade to 'BBB+'. Notably, the outlook for hospital capital spending remains somewhat uncertain, given the dynamic and still-evolving healthcare landscape in light of the beginnings of the coverage expansion in 2014 -2015.

Fitch expects CFN to be an active acquirer in calendar 2014-2015, possibly pushing leverage incrementally higher over the ratings horizon. A downgrade could result from a material and lasting deterioration in operations or a debt-funded transaction that resulted in materially depressed cash flows and/or an expectation for debt leverage to be sustained above 2x.

Fitch rates CareFusion Corp. as follows:

--Long-term Issuer Default Rating (IDR) 'BBB';

--Unsecured bank facility rating 'BBB';

--Unsecured notes rating 'BBB';

--Short-term IDR 'F2';

--Commercial paper rating 'F2'.

The Rating Outlook is Stable.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

-- 'Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage' (August 5, 2013);

-- 'U.S. Healthcare Stats Quarterly - Fourth-Quarter 2014' (April 25, 2014);

-- 'Hospitals Credit Diagnosis - Fourth-Quarter 2014' (April 10, 2014).

Applicable Criteria and Related Research:

Hospitals Credit Diagnosis (Consolidation Supports Growth in a Weak Organic Operating Environment)

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=745816

U.S. Healthcare Stats Quarterly - Fourth-Quarter 2013

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=745895

Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=715139

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=830297

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Contacts

Fitch Ratings
Primary Analyst
Jacob Bostwick, CPA
Director
Fitch Ratings, Inc.
+1-312-368-3169
70 W Madison Street
Chicago, IL 60602
or
Secondary Analyst
Bob Kirby, CFA
Director
+1-312-368-3147
or
Committee Chairperson
Michael Weaver
Managing Director
+1-312-368-3156
or
Media Relations
Brian Bertsch, +1 212-908-0549
brian.bertsch@fitchratings.com

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Contacts

Fitch Ratings
Primary Analyst
Jacob Bostwick, CPA
Director
Fitch Ratings, Inc.
+1-312-368-3169
70 W Madison Street
Chicago, IL 60602
or
Secondary Analyst
Bob Kirby, CFA
Director
+1-312-368-3147
or
Committee Chairperson
Michael Weaver
Managing Director
+1-312-368-3156
or
Media Relations
Brian Bertsch, +1 212-908-0549
brian.bertsch@fitchratings.com