Reuters logo
in 10 months
Fitch: Bayer Remains on Rating Watch Negative
October 4, 2016 / 10:46 AM / in 10 months

Fitch: Bayer Remains on Rating Watch Negative

(The following statement was released by the rating agency) LONDON, October 04 (Fitch) Fitch Ratings has maintained German healthcare and life-science conglomerate Bayer AG's (Bayer) Long- and Short-Term Issuer Default Ratings (IDRs) of 'A'/'F1' on Rating Watch Negative (RWN). The senior unsecured instrument and subordinated debt - rated at 'A' and 'BBB+' respectively - also remain on RWN. The RWN continues to reflect Bayer's planned acquisition of US-based agrochemical company Monsanto (A-/RWN) for USD66bn (of which we expect up to USD47bn will be funded by debt), which could result in a downgrade of minimum two notches. Excluding the acquisition, Bayer's credit profile is compatible with a Long-Term 'A' IDR with a Stable Outlook on a standalone basis as the group has been deleveraging since its Merck consumer health acquisition, driven by strong free cash flow (FCF) generation, in combination with asset disposals and the use of hybrid debt to manage its financial risk profile. The ratings continue to reflect Bayer's strong market positions in different, uncorrelated sectors, spanning pharmaceutical, consumer and animal health, crop science as well as a majority stake in specialist plastics manufacturer Covestro. KEY RATING DRIVERS Business Risk Profile Strengthening The ratings remain underpinned by Bayer's strong market positions in the healthcare, animal health, and crop science markets. We believe the repositioning of Bayer's business model towards the life science sector will offer sound organic growth opportunities, which Fitch has incorporated into its rating case projections. All of these sectors share a strong focus on R&D and benefit from long-term positive economic and demographic trends. Bayer also holds a 64% stake in specialist plastics manufacturer Covestro, following a partial IPO in October 2015. While Bayer still controls Covestro's Board of Directors and its financial policy, we view this stake as non-core and expect a gradual divestment over time, subject to value creation for Bayer's shareholders. Although Covestro has performed satisfactorily post IPO as a result of prior significant restructuring, we would see the exit from this business as positive for Bayer's business risk profile. This is because it will reduce cyclicality, remove a structurally lower-margin business and free up capital to be invested in the remaining business that offers higher returns. Improving Profitability, Pharma-Driven We expect Bayer's profitability to improve over a four-year rating horizon, with EBITDA margin gradually trending towards 24% (from 21% in 2015). This will be driven by the encouraging performance of new treatments in the pharma segment, which attract structurally higher margins. Bayer's profitability is also supported by the realisation of cost synergies in the consumer health division and the currently satisfactory performance of Covestro. Bayer has, however, under-delivered on the revenue synergies expected from the Merck consumer health integration, due to under-investment in brands and R&D under previous ownership. Satisfactory FFO Generation, Deleveraging Fitch expects Bayer to return to funds from operations (FFO) adjusted net leverage of below 2.0x during the course of this year (around 1.7x by year-end), following a temporary breach peaking at 2.7x in 2014 as a result of the Merck consumer health acquisition. The deleveraging path is supported by the sale of the Covestro minority stake and the placement of hybrid debt, in addition to strong FCF margin of more than 5% achieved in 2015. We project fixed charge cover to trend towards 14x by 2018, which is strong for the rating category considering Bayer's exposure to both healthcare and chemicals, from 8.9x in 2015. Monsanto Acquisition Drives RWN The USD66bn acquisition of Monsanto could lead to an increase of Bayer's debt of up to USD47bn (USD19bn will be funded by equity). In line with our May 2016 rating action, we continue to expect Bayer's 'A' rating to be downgraded by at least two notches on completion, but to remain in the 'BBB' category. Bayer's final rating will be determined by the proportions of senior and subordinated/hybrid debt (which will depend on market conditions and investor appetite) and by the specific features of the hybrid debt (which will determine how much equity credit it receives). Depending on the level of the IDR, we would expect Bayer's subordinated debt to attract a crossover (BBB-) rating at best. We view the impact of the Monsanto transaction on Bayer's business profile as mixed. The acquisition is part of Bayer's shift towards the more cyclical agri-business from being a healthcare-orientated company with a below-average business risk profile but this will be balanced by better scale and diversification. In addition, Bayer faces execution risks in delivering an ambitious integration plan while attempting to maintain its focus on capital allocation, as the healthcare business also offers growth and investment opportunities and is subject to strong competition. 'A' Rating Category Targeted Bayer has communicated its intention to return to the 'A' rating category over the medium term. We believe it has a variety of strategic options to achieve this, including divestments. However, we view a successful integration of Monsanto and the delivery of the expected medium-term EUR1.5bn cost synergies as key to supporting FCF generation and a return to a higher rating, especially if the dividend policy remains unchanged. Hybrids Provide Financial Flexibility Fitch views hybrid debt now as a permanent feature of Bayer's capital structure to optimise investor reach as well as funding mix and costs. Fitch rates the hybrid notes two notches below Bayer's IDR given their long-dated maturity (more than 60 years), contractual subordination to senior debt and senior ranking only to common equity, reflecting their consequently lower recovery prospects in a bankruptcy or liquidation scenario relative to senior obligations. The hybrid issues qualify for 50% equity credit as they meet Fitch's criteria with regard to deep subordination, remaining effective maturity of at least five years (including coupon step up of less than 1% and replacement language) and deferrable interest coupon payments at the option of the issuer. All these features offer sufficient financial flexibility to protect the capital structure in our view. KEY ASSUMPTIONS Fitch's expectations are based on the agency's internally produced, conservative rating case forecasts. They do not represent the forecasts of rated issuers individually or in aggregate. Key Fitch forecast assumptions include: -Satisfactory organic growth profile with turnover growing at CAGR 2.6% over the four-year rating horizon. -EBITDA margin improving towards 24% in 2019 (from 22% in 2016) driven by the good performance of the recently launched pharma products. Profit margins are also supported by ongoing restructuring in the consumer health division, in addition to a resilient near-full year performance from Covestro. -Break-up fee of USD2bn (EUR1.8bn) in 2017 should the proposed Monsanto acquisition not go ahead. -An annual bolt-on acquisition budget of EUR800m in addition to capex assumed at around 5% of sales. -No further reduction of Covestro ownership, which remains a strategic option and management's intended strategy. Any disposal of shares applied to debt reduction or an acquisition accretive to profits could provide upside to the rating case projections (current value of Bayer's stake in Covestro estimated at EUR6.5bn) -A degree of FX volatility (part. EM - Russia, Brazil, China- and USD exposure) resulting in continued FX translation risk. RATING SENSITIVITIES Negative: Future developments that could lead to negative rating action include: - FFO adjusted net leverage above 2x on a continuing basis, for example, as a result of a severe drop in EBITDA due to an adverse economic environment or driven by large debt-financed acquisitions or shareholder returns - FFO fixed charge cover below 6x Upon completion of the Monsanto transaction, we will likely downgrade Bayer's ratings by at least two notches. The final ratings will depend on pro-forma leverage on completion and on the visibility and credibility of a sustainable de-leveraging path using cash flow and potential divestment proceeds. Positive: A positive rating action is currently not envisaged. If the transaction does not proceed, Fitch expects to affirm the rating at the current 'A' level. However future developments that could lead to positive rating actions include: - Further improvement in FFO adjusted net leverage to 1.0x or below on a continuing basis - FFO fixed charge cover above 8x - A larger proportion of sales stemming from the defensive healthcare segment. LIQUIDITY Fitch views Bayer's liquidity as strong. Bayer has access to funding sources spanning bonds, bank debt, commercial paper and EUR6.2bn of revolving credit facilities, of which EUR3.5bn are available at Bayer and EUR2.7bn at Covestro level. Both facilities were undrawn at end-2015. Bayer's cash position amounted to EUR1.9bn at end-2015 and the agency assumes a minimum FCF generation of EUR2.5bn p.a. over the four-year rating horizon (discounting any break-up fee associated with the Monsanto acquisition). Fitch assumes EUR200m as non-readily available cash in its liquidity calculation to allow for intra-year working capital swings. Contact: Principal Analyst Quentin Dumouilla Analyst +44 203 530 1790 Supervisory Analyst Frank Orthbandt Director +44 203 530 1037 Fitch Ratings Ltd 30 North Colonnade London E14 5GN Committee Chairperson Pablo Mazzini Senior Director +44 20 3530 1021 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com. Summary of Financial Statement Adjustments - Fitch has adjusted the debt by adding 8x of yearly operating lease expense related to long-term assets (EUR158m in 2015). We also estimate EUR200m of cash as restricted due to intra-year working capital swings, which is reflected in the readily available cash figure. We assign 50% equity credit top Bayer's hybrid instruments, adjusting our debt figure accordingly. Additional information is available on www.fitchratings.com. For regulatory purposes in various jurisdictions, the supervisory analyst named above is deemed to be the primary analyst for this issuer; the principal analyst is deemed to be the secondary. Applicable Criteria Criteria for Rating Non-Financial Corporates (pub. 27 Sep 2016) here Treatment and Notching of Hybrids in Non-Financial Corporate and REIT Credit Analysis (pub. 29 Feb 2016) here Additional Disclosures Solicitation Status here Endorsement Policy here ail=31 ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT 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. 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

0 : 0
  • narrow-browser-and-phone
  • medium-browser-and-portrait-tablet
  • landscape-tablet
  • medium-wide-browser
  • wide-browser-and-larger
  • medium-browser-and-landscape-tablet
  • medium-wide-browser-and-larger
  • above-phone
  • portrait-tablet-and-above
  • above-portrait-tablet
  • landscape-tablet-and-above
  • landscape-tablet-and-medium-wide-browser
  • portrait-tablet-and-below
  • landscape-tablet-and-below