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Fitch Rates Thermo Fisher's EUR1B Commercial Paper Program 'F2'
December 7, 2016 / 7:06 PM / a year ago

Fitch Rates Thermo Fisher's EUR1B Commercial Paper Program 'F2'

(The following statement was released by the rating agency) NEW YORK, December 07 (Fitch) 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. KEY ASSUMPTIONS 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. RATING SENSITIVITIES 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. AMPLE LIQUIDITY 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. Contact: Primary Analyst Gregory Dickerson Director +1-212-908-0220 Fitch Ratings, Inc. 33 Whitehall Street New York, NY 10004 Secondary Analyst Megan Neuburger, CFA Managing Director +1-212-908-0501 Committee Chairperson David Peterson Senior Director +1-312-368-3177 Media Relations: Alyssa Castelli, New York, Tel: +1 (212) 908 0540, Email: Date of relevant rating committee: March 1, 2016 Additional information is available on 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. 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