Fitch Maintains Baxter International on Rating Watch Negative

CHICAGO--()--Fitch Ratings has maintained Baxter International Inc.'s (Baxter; NYSE: BAX) long- and short-term ratings on Rating Watch Negative. Fitch placed the company's ratings on Negative Watch in March 2014 when Baxter announced it plans to spin off its BioScience business. A full list of the company's ratings follows at the end of this press release.

The ratings apply to approximately $9.21 billion of debt outstanding at Dec. 31, 2014.

KEY RATING DRIVERS

--Baxter's anticipated spinoff its BioScience business (near July 1, 2015) to existing shareholders appears fairly straightforward in terms of the company's franchises. However, Baxter's post-spin capital structure and operating profile will be the major determinant of the company's ultimate credit rating.

--With leverage (total debt/EBITDA) currently at 2.4 times (x), Baxter will likely enter the spinoff with leverage above the 1.7x, which Fitch considers more consistent with an 'A' credit rating for this company.

--Fitch believes the split makes strategic sense as the two business segments generally service different end markets. The Medical Products business primarily serves acute and non-acute care provider settings, while the BioScience business mostly works with individual physicians or physician practices, with a particular focus on hematologists.

--The Bioscience spin will decrease Baxter's scale and product breadth. However, Fitch believes the more narrow focus of legacy Baxter will help to drive improved operational efficiency and optimal capital allocation.

--The integration of the Gambro acquisition is essentially complete and Fitch believes Baxter is on track to generate $300 million in annual synergies by 2017.

--Fitch anticipates that Baxter will maintain a stable operating profile in the intermediate term, driven by moderate organic growth, relatively stable legacy margins and consistently positive FCF.

--Fitch will resolve the Rating Watch near or at the time of the spin when it has greater certainty regarding the profitability, cash generation potential and capital structure of post-spin legacy Baxter.

REMAINING OPERATING PROFILE AND CAPITAL STRUCTURE WILL DETERMINE RATING

Legacy Baxter post-spin will operate as a more narrowly focused and lower margin business. Nevertheless, Fitch believes the company will still generate long-term organic growth, relatively stable margins and consistently positive free cash flow, and the company's post-spin operating profile and capital structure will ultimately determine the company's credit rating. Fitch expects EBITDA margins will range between 18% - 21% and organic revenue growth will be in the low- to mid-single-digit range. However, Fitch is currently less certain about the level of normalized FCF and the degree of leverage with which BAX will operate.

LEVERAGE HIGH FOR CURRENT RATING

Current leverage is high for BAX's 'A' rating, as the company used debt to finance the expansion of its plasma manufacturing facility in Covington, Georgia and its September 2013 acquisition of Gambro. While Fitch views both as positive strategic pursuits, but an additional $3.75 billion in debt was incurred to finance these initiatives. The back-end loaded nature of the operational/financial benefits from increased plasma product sales and integration synergies from Gambro further stressed near-term leverage. Fitch will evaluate whether there is a pathway for deleveraging through the allocation of debt to the bioscience division, improvement in EBITDA and possible debt pay-downs during the forecast period.

DIVERSIFICATION VERSUS FOCUS

The Bioscience spin will result in a post-spin, legacy Baxter that is smaller in both scale and product breadth. In addition, the Medical Products business operates with lower margins than the BioScience business, although it also has lower capital expenditure requirements. Fitch believes the more narrow focus of legacy Baxter will help drive improved operational efficiency and optimal capital allocation.

GAMBRO INTEGRATION ESSENTIALLY COMPLETE

Baxter has essentially completed the integration of Gambro AB, which it acquired in September 2013 for approximately $3.9 billion. Fitch expects Baxter will achieve $300 million in annual synergies by 2017. The acquired Gambro business enabled Baxter to expand both its renal portfolio (particularly in hemodialysis) offering and its geographic reach. Baxter funded the acquisition with approximately $1 billion of international cash balances and $3.5 billion of new debt issuance, resulting in a significant increase in leverage.

CONTINUED OPERATIONAL STABILITY

Fitch expects BAX to generate 3%-4% organic growth in nearly all of its business segments through 2015, 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 (pricing) and, to a lesser extent, utilization. Fitch expects that the commercializing of pipeline products will also provide support for longer-term growth and margin stability.

ACQUISITIVE POSTURE TO PERSIST OVER LONG TERM

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. Baxter currently has no flexibility within the 'A' rating category to pursue leveraging acquisitions.

KEY ASSUMPTIONS

Fitch's key assumptions incorporated into Fitch's Negative Ratings Watch for Baxter include:

--BioScience spinoff will occur near July 1, 2015;

--Low to mid-single-digit organic revenue growth;

--Post-spin Baxter to operate with lower margins due to revenue mix;

--Positive, but lower FCF post spin;

--Capital structure, cash deployment priorities and a more detailed view of the operating profile of post-spin Baxter still to be determined.

RATING SENSITIVITIES

Fitch will resolve the Negative Watch near or at the time of the spinoff when it has greater clarity as to the profitability, cash generation potential and capital structure of post-spin legacy Baxter.

Fitch has maintained the following ratings for Baxter on Rating Watch Negative:

--Long-term IDR 'A';

--Short-term IDR 'F1';

--Senior unsecured notes 'A';

--Bank credit facility 'A';

--Commercial paper 'F1'.

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

Applicable Criteria and Related Research:

--'Corporate Rating Methodology' (May 28, 2014).

Applicable Criteria and Related Research:

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

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749393

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=981693

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Contacts

Fitch Ratings
Primary Analyst
Bob Kirby, CFA
Director
+1-312-368-3147
Fitch Ratings, Inc.
70 W. Madison Street
Chicago, IL 60602
or
Secondary Analyst
Megan Neuburger
Managing Director
+1-212-908-0501
or
Committee Chairperson
Michael Weaver
Managing Director
+1-312-368-3156
or
Media Relations:
Alyssa Castelli, New York, +1 212-908-0540
Email: alyssa.castelli@fitchratings.com
Elizabeth Fogerty, New York, +1 212-908-0526
Email: elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Bob Kirby, CFA
Director
+1-312-368-3147
Fitch Ratings, Inc.
70 W. Madison Street
Chicago, IL 60602
or
Secondary Analyst
Megan Neuburger
Managing Director
+1-212-908-0501
or
Committee Chairperson
Michael Weaver
Managing Director
+1-312-368-3156
or
Media Relations:
Alyssa Castelli, New York, +1 212-908-0540
Email: alyssa.castelli@fitchratings.com
Elizabeth Fogerty, New York, +1 212-908-0526
Email: elizabeth.fogerty@fitchratings.com