Fitch Ratings has downgraded Bausch Health Companies Inc.'s (BHC) and Bausch Health Americas Inc.'s (BHA) Issuer Default Ratings (IDRs) to 'C' from 'B-' and their unsecured debt ratings to 'C'/RR5' from 'B-'/'RR4' and removed the Rating Watch Negative (RWN).

Fitch maintains BHC's and BHA's secured first-lien debt (rated 'BB-'/'RR1') on RWN. The RWN reflects the risk of lower recoveries and ratings if the spinoff of Bausch + Lomb (BLCO) moves forward and collateral value is lost.

The rating actions follow BHC's announcement that it will engage in what Fitch views as a distressed debt exchange (DDE) with its senior unsecured issuances. BHC has offered up to $2.5 billion of first-lien secured notes, $500 million of second-lien secured notes, and $1 billion of senior secured the subsidiary borrower for the exchange unsecured notes. The net proceeds of the issuance will be used to exchange its unsecured notes maturing in 2025 through 2031 at close to market levels.

Key Rating Drivers

Distressed Debt Exchange: Fitch views BHC's offering as a DDE as there is a material reduction in the original terms for these unsecured issuances. When assessing distressed debt exchanges, Fitch considers if failure of a large part of the creditor group to accept the offer would call into doubt the issuer's ability to fulfil the original contractual terms.

Significant deterioration of credit quality is likely if BHC is unsuccessful at defending its XIFAXAN patents and completing the BLCO spinoff. If the exchange offering terms are accepted, BHC would meaningfully reduce its approximately $11.8 billion outstanding unsecured notes and its exposure to shorter-dated maturities. If the exchange closes, Fitch will reassess the credit profile of the resulting capital structure.

Court Ruling Stresses Credit Profile: A district court has invalidated U.S. patents protecting the composition and use of XIFAXAN for treatment of IBS-D but also ruled that U.S. patents protecting XIFAXAN for the treatment of hepatic encephalopathy (HE) recurrence are valid. Fitch expects BHC to appeal the court's anticipated final order, and the FDA may require an in vivo bioequivalency study before approving a generic version of XIFAXAN. This would delay a generic entrant for the IBS-D indication. The court order places XIFAXAN's revenues and profitability at risk, earlier than expected in 2028, when other generic manufacturers are expected to launch their versions of XIFAXAN. If BHC proceeds with the spinoff of Bausch + Lomb Corporation (BLCO), the XIFAXAN patent risk to BHC is amplified.

Watch Reflects Potential Operating/Financial Stress: The possibility of losing a significant portion of its profitable product, XIFAXAN, poses significant headwinds to BHC's operating and financial performance. Cash generation would be meaningfully stressed, hampering its ability to fund growth initiatives and reduce leverage. The timing of a generic entrant remains unclear, as it depends on the outcome of future litigation and the FDA regulatory approval process. Since 2016, the company significantly reduced the absolute level of Fitch-calculated debt outstanding with a combination of internally generated cash flow and proceeds from asset divestitures. However, that initiative is at risk.

B+L Spinoff Underway: Fitch views the planned spinoff of Bausch's eye care business as strategically sound given limited synergies between the branded pharma business and eye care, but the loss of BLCO's operating and financial stability creates significant risk to BHC's credit profile. BHC already executed an 11.3% IPO of BLCO in 1H22. Prior to the court ruling dealing with XIFAXAN, it was clear that BHC planned to follow with another 8.7% of BLCO and to unrestrict the entity and distribute the remaining shares through an in-kind transaction. Proceeds from such transactions and the potential debt reduction would likely be insufficient to reduce leverage and offset the loss of diversification and cashflows.

Coronavirus Headwinds: The pandemic adversely affected Bausch's operating performance during 2020, particularly in the second quarter. The company's Ortho Dermatologics, Dentistry and Global Surgical businesses, which account for roughly 13% of revenues have been hit the hardest. The company adjusted its operations to mitigate some of challenges, including manufacturing and marketing. While Fitch believes the industry is more prepared with protocols, vaccines and therapeutics, some uncertain related to the evolution of the virus remain.

Reliance on New Products: The stabilization of Bausch Health's operating profile relies on an increased focus on developing an internal research and development pipeline, which Fitch believes is constructive for the company's credit profile over the long term. This strategy is not without risk since Bausch Health needs to ramp up the utilization of recently-approved products through successful commercialization efforts.

These products include Siliq (for the treatment of moderate-to-severe plaque psoriasis, although with safety restrictions), Bryhali (plaque psoriasis), Lumify (red eye) and Vyzulta (glaucoma). The latter two will move with BLCO post-spinoff. BHC also has a phase II pipeline candidate for the treatment of ulcerative colitis, two candidates to treat acne and a number of products that it will incorporate into its International business as greenfield geographic expansion opportunities.

Derivation Summary

Bausch Health is significantly larger and more diversified than specialty pharmaceutical industry peers Mallinckrodt plc and Endo International plc. While all three manufacture and market specialty pharmaceuticals and have maturing pharmaceutical products, Bausch Health's BLCO business meaningfully decreases business concentration risk relative to Mallinckrodt and Endo. BLCO offers operational diversification in terms of geographies and payers. However, the proposed complete separation of BLCO will narrow the company's focus.

BHC's rating also reflects gross debt leverage that is higher than its peers, but BHC does not face contingent liabilities related to the opioid epidemic. However, it does face significant patent expiry risk, which is amplified by the proposed spinoff of BLCO. Bausch accumulated a significant amount of debt through numerous acquisitions. In addition, BHC had a number of missteps in the integration process and other operational issues.

Parent-Subsidiary Linkage

The approach taken is a weak parent (BHC)/strong subsidiary (BHA). Using its Parent and Subsidiary Linkage Rating Criteria, Fitch concludes there is open ring fencing and access & control. As such, Fitch rates the parent and subsidiary at the consolidated level with no notching between the two.

Key Assumptions

BLCO is separated from BHC through the sale of the remaining interests up to 20% and the distribution of the remainder to shareholders resulting in the complete loss of associated revenues and EBITDA.

EBITDA of $2.3 billion - $2.4 billion post BLCO spinoff and significantly lower if XIFAXAN patent defense does not prevail;

Annual FCF of $600 million - $700 million post BLCO spinoff and potentially flat to negative if XIFAXAN patent defense does not prevail.

RATING SENSITIVITIES

Factors that could, individually or collectively, lead to positive rating action/upgrade:

Fitch will reassess BHC's capital structure, liquidity and risk profile based on the outcome of the Exchange Offer to determine its IDR, secured and unsecured ratings.

Factors that could, individually or collectively, lead to negative rating action/downgrade:

Following the exchange offer 's outcome, Fitch anticipates downgrading the IDR to 'RD'.

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 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.

Liquidity and Debt Structure

BHC Liquidity: Bausch Health had adequate near-term liquidity at June 30, 2022 including restricted and unrestricted cash on hand of $1.9 billion of which $1.2 billion of the restricted cash will be used to fund the pending settlement with the U.S. securities litigation. The company's amended credit facility includes a $975 million revolver and matures in 2027. At June 30, 2022, the company had $425 borrowings on this facility. The company's most recent refinancing activities have satisfied debt maturities through 2024.

KEY RECOVERY RATING ASSUMPTIONS

Debt Instrument Notching & Recovery Assumptions: The recovery analysis assumes that BHC would be considered a going concern (GC) in bankruptcy and that the company would be reorganized rather than liquidated. The analysis is based on the on the pro forma loss of the eye care business and debt outstanding at after the proposed debt exchange.

Fitch estimates a standalone reorganized EV for BHC of $11.9 billion and then adds an assumed $1.5 billion to reflect BHC's 50.1% share of BLCO's equity post BLCO fully drawing down on its revolver, resulting in $13.4 billion of EV available for claimants. Fitch assumes that administrative claims consume 10% of this value in the recovery analysis. The remaining 38.6% of BLCO shares that BHC owns is held at an unrestricted subsidiary and is not assumed to be available to BHC first-lien secured creditors.

The GC EV is based upon estimates of post-reorganization EBITDA and the assignment of an EBITDA multiple. Fitch's estimate of BHC's GC EBITDA, excluding BLCO, is $1.7 billion. The assumed going concern EBITDA reflects a scenario where the XIFAXAN loses significant market share and the company experiences some shortfalls in commercializing the R&D pipeline, thereby resulting in a restructuring or default. The GC EBITDA in Fitch's previous review was higher as it then incorporated BLCO on a consolidated basis as the review was prior to the completion of the IPO.

Fitch assumes a recovery EV/EBITDA multiple of 7.0x for Bausch. This is at the higher end of the range of 6.0x-7.0x Fitch typically assigns to specialty pharmaceutical manufacturers. However, BHC is more diversified than many of its peers, and the 50.1% ownership of BLCO business adds significant stability to the operations. The current average forward public market trading multiple of Bausch Health and the company's closet peers is about 9x.

Fitch applies a waterfall analysis to the going concern EV based on the relative claims of the debt in the capital structure, and assumes that the company would fully draw the revolvers in a bankruptcy scenario. Proforma for the proposed exchange offer, the senior secured first-lien credit facility, including the secured first-lien term loans and secured first-lien term revolver, and senior secured notes ($10.8 billion in the aggregate), have outstanding recovery prospects in a reorganization scenario and are rated 'BB-'/'RR1' as they are unaffected in the DDE. The unsecured debt ($4.8 billion in the aggregate) is rated 'C'/'RR5'. Fitch estimates total pro forma fully drawn debt for the exchange, including secured the subsidiary borrower will total $17.2 billion excluding BLCO debt.

Issuer Profile

BHC is a multinational healthcare company headquartered in Laval, Quebec that develops, manufactures and markets pharmaceutical and medical products. It has significantly expanded the scope and geographic reach of its product offering since the initial merger of Bausch and Biovail in 2009.

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

Bausch Health Companies Inc. has an ESG Relevance Score of '4' for Exposure to Social Impacts due to pressure to contain healthcare spending growth, a highly sensitive political environment, and social pressure to contain costs or restrict pricing. This has a negative impact on the credit profile, and is relevant to the rating in conjunction with other factors.

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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