NEW YORK--(BUSINESS WIRE)--Fitch Ratings has assigned an 'F2' rating to Thermo Fisher Scientific Inc.'s (Thermo Fisher) new EUR1 billion commercial paper (CP) program.
There will be two issuers under the program, Thermo Fisher Scientific (Finance I) B.V. and Thermo Fisher Scientific (IVGN) B.V. Each entity is a wholly-owned subsidiary of Thermo Fisher and neither entity conducts independent operations other than its financing operations. Each of the two issuers will be fully guaranteed by Thermo Fisher.
Thermo Fisher's ratings apply to approximately USD18.9 billion of debt at Oct. 1, 2016. A full list of ratings follows at the end of this release. The Rating Outlook is Stable.
Thermo Fisher's CP program, which also includes a USD 1.5 billion U.S. CP facility, will have external liquidity back-up through a USD 2.5 billion capacity multi-currency revolving credit facility (RCF) that expires in July 2021.
If the company borrows under the facility, it intends to leave an amount undrawn sufficient to cover outstanding CP, which totalled USD 820.5 million at Sept. 30, 2016. As of that date, there were no borrowings under the facility, although capacity was reduced by USD 67 million in letters of credit outstanding.
Internal sources of liquidity back-up include annual FCF that Fitch projects to total approximately USD3 billion beginning in 2017, as well as Fitch's estimate of around USD 600 million of unrestricted cash on hand (net of debt repayments of USD1.4 billion in October 2016) at Oct. 1, 2016.
KEY RATING DRIVERS
--Fitch calculates pro forma gross leverage of around 3.5x following the recent acquisition of FEI Company for USD 4.2 billion in cash. Fitch expects gross leverage to return to roughly 3x by the end of 2017, a level that we view as consistent with the 'BBB' rating.
--Flexibility at Thermo Fisher's current 'BBB' rating is limited until its de-levering plan is complete. This should be achievable if near-term targets are bolt-on acquisitions that augment the company's product portfolio. Larger transactions during this timeframe would likely require a component of equity financing to maintain the current rating category.
--Fitch views the possibility of aggressive capital management, and not operating risk, as Thermo Fisher's key credit risk. Capital deployments for acquisitions and shareholder payments have occasionally contributed to higher debt levels and deterioration of credit metrics, reducing financial flexibility in the aftermath of leveraging transactions.
--Thermo Fisher's diversification across customer markets and product categories helps to mitigate the impact of cyclical downturns or secular headwinds to sales or profitability in any one of the company's end markets.
--Thermo Fisher's ample FCF, which could exceed USD3 billion in 2017, should be sufficient to repay debt issued to finance bolt-on acquisitions, as well as to fund share repurchases of at least USD1 billion in 2016.
Fitch's key assumptions within the rating case for Thermo Fisher include:
--Thermo Fisher's gross debt leverage rises to between 3.5x-3.6x by the end of 2016 but returns closer to 3.0x by year-end 2017, benefitting from debt repayment and EBITDA growth.
--Revenue growth of about 3%-4% over the forecast period. This reflects Fitch's general expectations for growth in the life sciences sector. Persistent headwinds in developed industrial markets will be offset by stronger growth in emerging markets and biopharmaceutical end markets.
--The operating EBITDA margin rises slightly through the end of 2018 due to some continued cost benefits from the integration of Life Tech, as well as a stable pricing environment.
--Cash from operations is more than sufficient to fund a slightly increasing dividend, greater than USD 4 billion of bolt-on acquisitions and over USD4 billion of share repurchases over the next three years.
--Annual FCF exceeds USD3 billion throughout the forecast period.
Thermo Fisher's favorable business profile, with significant scale, good end-market diversification and improved product mix following the Life Tech acquisition all support the ratings. Therefore, rating actions are more likely to be triggered by capital deployment decisions than by an operational stress scenario.
Maintenance of the 'BBB' Issuer Default Rating considers Fitch's continued expectation that Thermo Fisher will be an active acquirer going forward while maintaining run-rate gross debt/EBITDA of between 2.8x-3.2x in most periods. Fitch recognizes that gross leverage may occasionally exceed this range in the immediate aftermath of leveraging transactions. If Thermo Fisher were to complete a leveraging transaction that cast doubt on its ability to return leverage to roughly 3x within the following 18-24 months, it could result in a downgrade.
A near-term positive rating action is not anticipated, since it would require a commitment from the company to maintain leverage below 2.5x.
COMMITMENT TO DEBT REDUCTION FOLLOWING ACQUISITIONS
In assessing Thermo Fisher's commitment to maintaining a financial profile consistent with solid investment-grade ratings, Fitch strongly considers the successful execution of its de-levering plan following its acquisition of Life Technologies Corp. (Life Tech) for USD16.8 billion in 2014.
Despite funding a high level of business development activities and returns to shareholders, Thermo Fisher has a generally strong track record of maintaining gross leverage within a publicly stated target range of 2.5x-3.0x over most periods.
LIMITED FLEXIBILITY AT 'BBB' RATING
Flexibility at Thermo Fisher's current 'BBB' rating is limited until its de-levering plan is complete. This should be achievable if most targets are moderately-sized bolt-on acquisitions that augment the company's product portfolio. Larger transactions during this timeframe would require a component of equity financing in order to maintain the company's credit metrics at levels commensurate with the current rating category.
Thermo Fisher's solid financial flexibility and strong liquidity is an important factor supporting the investment-grade credit profile. At Oct. 1, 2016, the company's sources of liquidity included USD2 billion of cash on hand (roughly USD600 million pro forma for USD1.4 billion of debt repayment in October 2016) and USD2.4 billion of capacity under its USD2.5 billion RCF. As noted above, the RCF is back-up for the CP program and if the revolver is drawn the company intends to leave an available balance at least equal to the amount of CP outstanding.
Cash generation has historically been strong and consistent. Fitch forecasts that Thermo Fisher could produce USD3 billion or more in FCF annually for the next several years. The debt maturity schedule of the company's senior notes is laddered.
FULL LIST OF RATING ACTIONS
Fitch assigns the following rating:
--EUR1 billion commercial paper program at 'F2.'
Fitch currently rates Thermo Fisher as follows:
Thermo Fisher Scientific Inc.
--Long-Term IDR and senior notes 'BBB';
--Bank revolving credit facility 'BBB';
--Short-Term IDR 'F2';
--Commercial paper 'F2'.
Life Technologies Corp.
--Long-Term IDR and senior notes 'BBB'.
The Rating Outlook is Stable.
Date of relevant rating committee: March 1, 2016
Additional information is available on www.fitchratings.com
Summary of Financial Statement Adjustments - Financial statement adjustments that depart materially from those contained in the published financial statements of the relevant rated entity or obligor are disclosed below:
--Historical and projected EBITDA is adjusted to add back non-cash stock-based compensation.
Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage - Effective from 17 August 2015 to 27 September 2016 (pub. 17 Aug 2015)
Criteria for Rating Non-Financial Corporates (pub. 27 Sep 2016)
Copyright © 2016 by Fitch Ratings, Inc., Fitch Ratings Ltd. and its subsidiaries. 33 Whitehall Street, NY, NY 10004. Telephone: 1-800-753-4824, (212) 908-0500. Fax: (212) 480-4435. Reproduction or retransmission in whole or in part is prohibited except by permission. All rights reserved. In issuing and maintaining its ratings and in making other reports (including forecast information), Fitch relies on factual information it receives from issuers and underwriters and from other sources Fitch believes to be credible. Fitch conducts a reasonable investigation of the factual information relied upon by it in accordance with its ratings methodology, and obtains reasonable verification of that information from independent sources, to the extent such sources are available for a given security or in a given jurisdiction. The manner of Fitch's factual investigation and the scope of the third-party verification it obtains will vary depending on the nature of the rated security and its issuer, the requirements and practices in the jurisdiction in which the rated security is offered and sold and/or the issuer is located, the availability and nature of relevant public information, access to the management of the issuer and its advisers, the availability of pre-existing third-party verifications such as audit reports, agreed-upon procedures letters, appraisals, actuarial reports, engineering reports, legal opinions and other reports provided by third parties, the availability of independent and competent third- party verification sources with respect to the particular security or in the particular jurisdiction of the issuer, and a variety of other factors. Users of Fitch's ratings and reports should understand that neither an enhanced factual investigation nor any third-party verification can ensure that all of the information Fitch relies on in connection with a rating or a report will be accurate and complete. Ultimately, the issuer and its advisers are responsible for the accuracy of the information they provide to Fitch and to the market in offering documents and other reports. In issuing its ratings and its reports, Fitch must rely on the work of experts, including independent auditors with respect to financial statements and attorneys with respect to legal and tax matters. Further, ratings and forecasts of financial and other information are inherently forward-looking and embody assumptions and predictions about future events that by their nature cannot be verified as facts. As a result, despite any verification of current facts, ratings and forecasts can be affected by future events or conditions that were not anticipated at the time a rating or forecast was issued or affirmed.
The information in this report is provided "as is" without any representation or warranty of any kind, and Fitch does not represent or warrant that the report or any of its contents will meet any of the requirements of a recipient of the report. A Fitch rating is an opinion as to the creditworthiness of a security. This opinion and reports made by Fitch are based on established criteria and methodologies that Fitch is continuously evaluating and updating. Therefore, ratings and reports are the collective work product of Fitch and no individual, or group of individuals, is solely responsible for a rating or a report. The rating does not address the risk of loss due to risks other than credit risk, unless such risk is specifically mentioned. Fitch is not engaged in the offer or sale of any security. All Fitch reports have shared authorship. Individuals identified in a Fitch report were involved in, but are not solely responsible for, the opinions stated therein. The individuals are named for contact purposes only. A report providing a Fitch rating is neither a prospectus nor a substitute for the information assembled, verified and presented to investors by the issuer and its agents in connection with the sale of the securities. Ratings may be changed or withdrawn at any time for any reason in the sole discretion of Fitch. Fitch does not provide investment advice of any sort. Ratings are not a recommendation to buy, sell, or hold any security. Ratings do not comment on the adequacy of market price, the suitability of any security for a particular investor, or the tax-exempt nature or taxability of payments made in respect to any security. Fitch receives fees from issuers, insurers, guarantors, other obligors, and underwriters for rating securities. Such fees generally vary from US$1,000 to US$750,000 (or the applicable currency equivalent) per issue. In certain cases, Fitch will rate all or a number of issues issued by a particular issuer, or insured or guaranteed by a particular insurer or guarantor, for a single annual fee. Such fees are expected to vary from US$10,000 to US$1,500,000 (or the applicable currency equivalent). The assignment, publication, or dissemination of a rating by Fitch shall not constitute a consent by Fitch to use its name as an expert in connection with any registration statement filed under the United States securities laws, the Financial Services and Markets Act of 2000 of the United Kingdom, or the securities laws of any particular jurisdiction. Due to the relative efficiency of electronic publishing and distribution, Fitch research may be available to electronic subscribers up to three days earlier than to print subscribers.
For Australia, New Zealand, Taiwan and South Korea only: Fitch Australia Pty Ltd holds an Australian financial services license (AFS license no. 337123) which authorizes it to provide credit ratings to wholesale clients only. Credit ratings information published by Fitch is not intended to be used by persons who are retail clients within the meaning of the Corporations Act 2001