BAUSCH HEALTH COMPANIES INC.
Fitch Ratings has assigned a first-time rating of 'BB- (EXP)' Issuer Default Rating (IDR) to
The net proceeds from the offering, new term loans, recent bond issuance and the expected BLCO IPO will refinance
Key Rating Drivers
BLCO Solid Eye Care Business: BLCO is a leading global eye health company with a portfolio of over 400 products. Fitch expects that it will maintain an investment-grade capitalization upon its separation from BHC and transition from a secured borrowing base to unsecured.
Fitch views BLCO as significantly smaller than
BLCO's Ratings Tied to BHC's: The primary driver of BLCO's ratings is that of BHC's IDR (B/Negative) until the completion of the separation. Fitch views the ringfencing and access and control factors to be porous thereby allowing BHC's credit profile to influence BLCO's. Fitch notches BLCO's ratings two notches higher than BHC's and, until separation, any changes in the linkage could lower BLCO's ratings.
Moreover, changes to BHC's ratings would influence BLCO's until they are assessed on a stand-alone basis. An investment-grade rating would likely have leverage below 3.5x and an unsecured capital structure. Fitch will assess BLCO's corporate governance and its impact on ratings and ESG Relevance Scores as it relates to the separation. Additional detail on BHC's ratings can be found in the RAC dated
Coronavirus Impact Moderating: BLCO's business is recovering from the negative impact of COVID-19. Cataract and laser vision correction surgeries faced significant challenges as these procedures are generally considered elective or deferrable. Looking back, the second quarter of 2020 will probably remain the trough in revenues. Fitch believes growth will continue as population immunity increases, more therapeutics and diagnostic tests become available and protocols by providers mitigate the risk and patient concern associated with having these procedures. Nevertheless, the potential emergence of a resistant and more virulent variant could lead to a setback in procedure volumes.
Supply Chain/Inflation: Supply chain constraints and inflationary pressures present challenges to many firms in the health care sector. BLCO is generally managing these issues through building stocks of raw materials and API. In addition, the company is adding redundancies in its suppliers.
Reliably Increasing Demand: Aging demographics, improved income demographics in emerging markets, increasing digital screen times and the ongoing increase in the incidence of diabetes will likely drive low- to mid-single digit growth in the demand for eye health products and services during the intermediate term. A significant number of BLCO's products enjoy leading market positions and strong brand recognition. Consumables and implantables account for roughly 52% and 28% of BLCO's revenues, respectively. The company's product portfolio has only limited exposure to market exclusivity losses.
Pipeline to Support Growth: Innovation is important to remain competitive in the eye health market, Fitch views the company's R&D efforts will help to drive intermediate- and long-term revenue growth while also supporting margins. BLCO makes consistent and significant investments in new product development. Its R&D efforts span all three businesses with intensity geared more towards surgical and ophthalmic pharmaceuticals. Fitch expects the company will also continue to pursue innovation in its Vision Care business with technological advancements being more incremental in nature.
Margin Expansion: Fitch expects that margins will improve over the forecast period. Improving sales mix and manufacturing efficiency gains should increase gross margins. SG&A as a percent of sales are forecasted to decline owing to strong management of other operating costs. In addition, increasing revenue should provide additional operating leverage. In addition, Fitch believes only a moderate amount BLCO's revenues are exposed to branded pharmaceuticals pricing issues in the
Consistently Positive FCF: Advancing sales, improving margins, solid working capital management and moderate capital expenditure requirements should support consistently positive and increasing FCF. Fitch does not expect that BLCO will pay dividends or engage in share repurchases during the near term. Capital deployment will focus on internal investment, external collaborations and targeted acquisitions.
For a global eye health company that includes medical devices and pharmaceuticals, Fitch believes BLCO has relatively minimal contingent liability risk regarding product liability, intellectual property and other regulatory issues. As such, we forecast BLCO's leverage (total debt/EBITDA) to decline over the forecast period to below 2.5x, primarily through EBITDA growth. The current level of balance sheet debt is generally viewed as a permanent component of the capital structure and maturities are expected to be refinanced.
Derivation Summary
BLCO's 'BB-(EXP)' IDR is based on it being a majority owned subsidiary of BHC until the separation. Fitch views BLCO to be a stronger subsidiary than the weaker parent and notches BLCO's ratings +2 from the consolidated parent's 'B' IDR. The notching is based on Fitch viewing the ringfencing to be porous due to the lack of any restrictive investment or dividend covenants and access and control to be porous due to some overlapping Board of Directors members. Until separation, BLCO's ratings will be influenced by BHC's whose Rating Derivation is described in the RAC dated
BLCO is significantly smaller than
BLCO is somewhat less diversified than
Parent Subsidiary Linkage
The approach taken is a weak parent (BHC)/strong subsidiary (BLCO). Using Fitch's PSL criteria, we conclude there is porous ring fencing and porous access & control. As such, we rate the parent and subsidiary at the consolidated level while notching the subsidiary's rating up by two.
The release of guarantees and the unrestricting of BLCO will occur upon the IPO and the achievement of 7.6x pro forma net leverage at BHC Parent, BLCO will be unrestricted under the Parent debt documents and its capital stock will no longer be pledged.
Fitch views imitations on investments, acquisitions and dividends provide a moderate degree of ring fencing. However, the credit facility can be amended.
BLCO will have its own Board of Directors (BOD), management and treasury operations. However, some BOD members are also members of BHC's BOD.
Key Assumptions
Mid- to high-single-digit organic revenue growth driven by the uptake of new product commercialization moderate offset by increased competitive pressure for some established products;
Annual FCF generation greater than
Dividends are not included in the forecast, but if instituted would decrease FCF by the same amount as Fitch defines as CFFO-capex-dividends;
Cash deployment prioritized for tuck-in acquisitions.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
BLCO
Fitch viewing BLCO on a standalone basis;
An upgrade of BHC. BHC's Rating Sensitivities are detailed below.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
BLCO
Evidence of factors related to ringfencing and access and control that would lead Fitch to rate BLCO on a consolidated basis with BHC or with one notch rather than two notches;
A downgrade of BHC. BHC's Rating Sensitivities are detailed below.
Factors that could, individually or collectively, lead to positive rating action/upgrade:
BHC
An expectation of gross debt leverage (total debt/EBITDA) durably below 6.0x;
BHC continues to maintain a stable operating profile and refrains from pursuing large, leveraging transactions including acquisitions;
Forecasted FCF remains significantly positive.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
BHC
Gross debt leverage (total debt/EBITDA) durably above 7.0x;
FCF significantly and durably deteriorates;
Refinancing risk increases and the prospect for meaningful leverage reduction weakens.
Best/Worst Case Rating Scenario
International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from '
Liquidity and Debt Structure
BLCO Liquidity: Fitch expects BLCO will have sufficient financial flexibility with an undrawn
Recovery Analysis Assumptions
Fitch applies a generic approach to rate and assign Rating Recoveries (RRs) to instruments for issuers rated 'BB-' or above. BLCO's first-lien security on its term loan receive a rating of 'BB+(EXP)'/'RR1', which is consistent with Fitch's criteria regarding first-lien debt of a 'BB-' issuer.
Issuer Profile
Date of Relevant Committee
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG Considerations
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg.
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