Fitch Ratings has downgraded
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
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
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
Court Ruling Stresses Credit Profile: A district court has invalidated
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
Reliance on New Products: The stabilization of
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
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
Annual FCF of
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 '
Liquidity and Debt Structure
BHC Liquidity:
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
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
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
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 (
Issuer Profile
BHC is a multinational healthcare company headquartered in
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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