Fitch Affirms Allergan at 'BBB-'; Outlook Revised to Stable

CHICAGO--()--Fitch Ratings has affirmed the ratings of Allergan plc (Allergan; NYSE: AGN) and its subsidiaries at 'BBB-'. Fitch has removed the ratings from Rating Watch Positive and assigned a Stable Outlook.

A full list of rating actions, which follow the termination of Allergan's merger with Pfizer, Inc. and apply to approximately $42.6 billion of debt outstanding at Dec. 31, 2015, are found at the end of this release.

KEY RATING DRIVERS

Scaled and Growing: On a standalone basis, Allergan (ex-generics) will remain one of the largest pharmaceutical companies in the world, with a diversified, growing, and durable product portfolio. Though less compelling than in a combination with Pfizer, Fitch expects Allergan to generate double-digit sales growth and strong cash generation over the ratings horizon.

Generics Sale Supports De-Leveraging: Net cash proceeds exceeding $30 billion from the sale of Allergan's generics business to Teva Pharmaceutical Industries Ltd. (NYSE: TEVA) should easily facilitate remaining de-leveraging following the 2015 acquisition of Allergan, Inc. (legacy Allergan). Fitch expects Allergan to reduce its year-end 2015 debt balance by at least $10 billion to meet its gross debt/EBITDA target of 3.5x.

More M&A Likely: Fitch expects Allergan to continue looking for strategic transactions of various sizes, particularly following the roughly $30 billion cash infusion from the sale of its generics business to Teva. Though aggressive at times, Allergan's M&A activity is largely sound, and its history of successful integration is supportive of its strong business risk profile. Furthermore, Fitch expects the firm to remain committed to rapid de-leveraging following large deals.

Botox, Restasis Headwinds: Competition could threaten a portion of Botox and Restasis sales in coming years, though offset by growing utilization of Botox therapeutic and the expected launch of a multi-dose version of Restasis. Botox and Restasis are Allergan's top two products, accounting for about $2 billion and $1 billion of 2015 sales, respectively.

Limited Impact from Treasury Rules: New rules released by the U.S. Treasury Department are not expected to materially affect Allergan's standalone business strategy or financial flexibility, based on Fitch's preliminary analysis. This will be particularly true following the three-year anniversary of the Warner Chilcott plc acquisition in October 2016.

RATING SENSITIVITIES

Successful consummation of its transaction with Teva, including expected debt repayment, will afford Allergan flexibility at its current 'BBB-' ratings, which consider run-rate gross debt/EBITDA of 3.0x - 3.5x. Cash flows, though muted without the generics business, and profitability are expected to be strong for the rating category. The Stable Outlook reflects Fitch's view that Allergan will consider large, transformative M&A transactions but is committed to de-leveraging and maintaining credit metrics consistent with an investment grade credit profile.

Fitch believes several facets of Allergan's credit profile, including its growth outlook, profitability, and durable product portfolio could support higher ratings than the current 'BBB-'. Positive ratings momentum could materialize in the 12 months following the generics business divestiture, depending on the firm's appetite for business development activity. A capital deployment strategy for the ex-generics business that includes a commitment to operating with gross debt/EBITDA around 3x or below could support consideration of an upgrade to 'BBB'.

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. Given the well-diversified nature of Allergan's product portfolio and strong expected cash generation, a downgrade scenario involving operational difficulties is unlikely.

KEY ASSUMPTIONS

Fitch makes the following key assumptions in its rating case forecast for Allergan:

--Top-line growth of the remaining (ex-generics) business in the double-digits;

--Teva divestiture transaction closes no later than June 30, 2016;

--EBITDA margins exceeding 50% in 2016, with costs of the generics divestiture offsetting some expense synergies realized from the legacy Allergan acquisition;

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

LIQUIDITY AND DEBT STRUCTURE

Allergan's liquidity profile is adequate, with cash on hand and revolver availability at Dec. 31, 2015 of $1.1 billion and $771 million, respectively. FCF was $3.7 billion in 2015. Internal liquidity will be strengthened following the close of the generics sale to Teva, adding roughly $20 billion of cash, net of anticipated taxes, fees, and debt repayment. Fitch believes Allergan will continue to enjoy strong access to external capital markets.

Debt repayment in first-half 2016 is expected to include outstanding revolver and term loan balances ($8.5 billion at Dec. 31, 2015) and the $800 million of 5.75% notes at Allergan, Inc. that matured April 1, 2016. FCF is expected to be more than sufficient to address well-laddered maturities of remaining indebtedness, which are estimated as follows: $500 million in 2016; $2.8 billion in 2017; $3.75 billion in 2018; $1.95 billion in 2019; $4.65 billion in 2020; and $19.7 billion thereafter.

FULL LIST OF RATING ACTIONS

Fitch has affirmed the following ratings:

Allergan 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-'.

The Rating Outlook for all IDRs above is Stable.

There have been made no financial statement adjustments that depart materially from those contained in the published financial statements of the relevant rated entities.

Date of Relevant Rating Committee: April 6, 2016

Additional information is available on www.fitchratings.com

Applicable Criteria

Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 17 Aug 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869362

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1002128

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1002128

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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