Fitch Affirms Allergan's 'BBB-' Ratings Following Generic Business Sale to Teva

CHICAGO--()--Fitch Ratings has affirmed the ratings for Allergan plc (formerly known as Actavis plc; NYSE: AGN) and its subsidiaries. The Rating Outlook is Stable.

A full list of rating actions, which apply to approximately $44.2 billion of total debt as of March 31, 2015, follows at the end of this release.

The affirmations follow Allergan's announcement that it will sell its generic drug manufacturing business to Teva Pharmaceutical Industries Limited (Teva; NYSE: TEVA) for approximately $40.5 billion. The purchase price represents a 17x EBITDA multiple, per Allergan management, and consists of $33.75 billion in cash and $6.75 billion in Teva stock. The firms expect the deal to close in first-quarter 2016, pending regulatory and other approvals.

Fitch expects Allergan to use a portion of the deal proceeds to complete its previously outlined de-leveraging plan - to achieve gross debt/EBITDA of 3.5x by March 31, 2016. Fitch anticipates debt repayment of up to $14 billion of the $44.2 billion balance at March 31, 2015 will be required to meet this target. Notably, required debt repayment could moderate depending on remaining legacy Allergan synergy capture, expected double-digit top-line growth, and additional M&A that drives incremental EBITDA growth and associated de-leveraging over the next couple of quarters.

KEY RATING DRIVERS

Firm Remains a Leader: New Allergan (ex-generics) will remain one of the largest pharmaceutical companies in the world, with a diversified, growing, and durable product portfolio generating double-digit sales growth and solid cash flows. Though unexpected at this time, Fitch views the divestiture of Allergan's generics business as strategically sound.

Cash Infusion Supports De-Leveraging: Net cash proceeds exceeding $30 billion should easily facilitate remaining de-leveraging following the acquisition of Allergan Inc. (legacy Allergan). Fitch anticipates that up to $14 billion of the $44.2 billion of debt outstanding at March 31, 2015 will need to be repaid in order for Allergan to meet its gross debt/EBITDA target of 3.5x by first-quarter 2016. However, this amount could moderate depending on synergy capture, sales growth, and additional M&A in the meantime.

More M&A Ahead: Fitch expects Allergan to look for more strategic transactions over the ratings horizon of various sizes, particularly with the large cash infusion from the sale of its generics business to Teva. Though aggressive at times, Fitch views Allergan's M&A activity as largely sound and supportive of an improving business outlook. Furthermore, Fitch expects the firm to remain committed to rapid de-leveraging following large deals.

Botox, Restasis Headwinds: Competition could threaten sales of Allergan's two best-selling products, Botox and Restasis, in coming years. A new class of migraine therapies are showing promising clinical trial results, and an application for generic Restasis has been accepted by the FDA. Botox therapeutic and Restasis accounted for about $1.2 billion and $1.1 billion of 2014 sales, respectively, though it is unlikely that these entire amounts are at risk. Furthermore, Allergan's acquisitions of late-stage assets from Merck and of Oculeve could help to backstop losses in these important product categories.

RATING SENSITIVITIES

Successful consummation of its transaction with Teva, including expected debt repayment, will afford Allergan incremental flexibility at its current 'BBB-' ratings. Allergan's 'BBB-' ratings consider run-rate gross debt/EBITDA of 3.0x - 3.5x. Cash flows, though somewhat muted without the generics business, and profitability are expected to be strong for the rating category.

Fitch notes that several facets of Allergan's credit profile, including its growth outlook, profitability, and strong product portfolio could support higher ratings than the current 'BBB-'. Indeed, positive ratings momentum could materialize over the next 12 - 18 months depending on the firm's business development activity. Nevertheless, positive rating actions will not be considered until de-leveraging to below 3.5x has been accomplished during 2016.

A capital deployment strategy for the new business, excluding generics, that includes a commitment to operating with gross debt/EBITDA of 3x or below, could support consideration of an upgrade to 'BBB'. Notably, Fitch will re-evaluate the Rating Sensitivities, including the aforementioned leverage target, for the new Allergan going forward.

A downgrade could occur if a significantly large debt-funded acquisition is pursued, particularly before the close of the Teva transaction, causing debt leverage to increase sustainably above 3.5x. The Stable Outlook, however, reflects Fitch's view that Allergan is committed to de-leveraging and maintaining credit metrics consistent with an investment grade credit profile.

KEY ASSUMPTIONS

--Top-line growth of the remaining business in the double-digits;

--Deal close at March 31, 2016;

--EBITDA margins exceeding 50% in 2016, with less credit for remaining synergy capture given costs of divesting the generics business;

--Debt repayment of approximately $4 billion in 2015, in excess of debt repaid in first-quarter 2015. Approximately $10 billion of debt repayment in 2016, mostly funded from the proceeds of the generics business sale, leading to gross debt/EBITDA trending toward 3x by year-end 2016;

--No material share repurchase activity in 2015 - 2016.

LIQUIDITY AND DEBT STRUCTURE

Internal liquidity is ample, comprising $2.1 billion in cash and $971 million available under the firm's $1 billion unsecured revolver due December 2019. The successful consummation of the firm's transaction with Teva will further support Allergan's internal liquidity profile, adding around $20 billion or more of cash, net of anticipated taxes, fees, and debt repayment. Furthermore, Allergan enjoys strong access to various forms of external liquidity.

Fitch expects Actavis to use deal proceeds to repay any still-outstanding term and bridge loan facilities ($10 billion at March 31, 2015), resulting in a relatively well-laddered bond maturity profile. Bond maturities are manageable relative to free cash flow expectations, due as follows: $1.3 billion in 2016; $2.7 billion in 2017; $3.75 billion in 2018; $1.95 billion in 2019; and $24.35 billion thereafter.

FULL LIST OF RATING ACTIONS

Fitch has affirmed the following ratings:

Allergan plc (f.k.a. Actavis plc)

--Issuer-Default Rating (IDR) at 'BBB-'.

Warner Chilcott Limited

--IDR at 'BBB-'.

Actavis Capital S.a r.l.

--Senior unsecured bank facilities at 'BBB-'.

Actavis Funding SCS

--Senior unsecured notes at 'BBB-'.

Actavis WC 2 S.a r.l.

--Senior unsecured bank facility at 'BBB-'.

Actavis, Inc.

--IDR at 'BBB-';

--Senior unsecured notes at 'BBB-'.

Forest Laboratories, Inc.

--IDR at 'BBB-';

--Senior unsecured notes at 'BBB-'.

Allergan, Inc.

--IDR at 'BBB-';

--Senior unsecured notes at 'BBB-'.

Additional information is available on www.fitchratings.com.

Applicable Criteria

Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 28 May 2014)

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

Evaluating Corporate Governance (pub. 12 Dec 2012)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=694649

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=988624

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=988624

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

Contacts

Fitch Ratings
Primary Analyst
Jacob Bostwick, CPA
Director
+1-312-368-3169
Fitch Ratings, Inc.
70 W. Madison Street
Chicago, IL 60602
or
Secondary Analyst
Bob Kirby, CFA
Director
+1-312-368-3147
or
Committee Chairperson
Megan Neuburger, CFA
Managing Director
+1 212-908-0501
or
Media Relations:
Alyssa Castelli, +1 212-908-0540
alyssa.castelli@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Jacob Bostwick, CPA
Director
+1-312-368-3169
Fitch Ratings, Inc.
70 W. Madison Street
Chicago, IL 60602
or
Secondary Analyst
Bob Kirby, CFA
Director
+1-312-368-3147
or
Committee Chairperson
Megan Neuburger, CFA
Managing Director
+1 212-908-0501
or
Media Relations:
Alyssa Castelli, +1 212-908-0540
alyssa.castelli@fitchratings.com