Fitch Ratings has removed from Rating Watch Negative Watch and affirmed at 'F2'
The affirmations reflect Fitch's view that the short-term ratings will be unchanged upon completion of the pending acquisition of
Fitch has maintained the Rating Watch Negative (RWN) on
Key Rating Drivers
Acquisition Makes Strategic Sense: Fitch views the
Increased connected care capabilities should help patient treatment and management in various care settings, including the hospital, the physician's office and home. Baxter should be able to expand
Acquisitive Posture to Persist: In the near term, Fitch believes the company will focus on deleveraging. Longer-term, Fitch believes the company will focus on targeted transactions that deepen its existing product portfolio or add adjacencies. The company has a very diverse portfolio of products, which presents the company with numerous acquisition targets.
Health-Essential Product Portfolio: Baxter provides medically necessary products, with leading market positions in many of its categories, and many of its products are capital intensive and require significant manufacturing expertise. Baxter's products maintain market share through differentiation on delivery method, quality manufacturing and the scale necessary to compete against other established manufacturers.
The company's portfolio includes more difficult-to-manufacture products that would require material investments and expertise for new entrants. The company's Advanced Surgery products are the portion of the portfolio that are most negatively affected by the coronavirus pandemic. Medication Delivery and Pharmaceutical products are also negatively affected by the pandemic.
End-Markets Support Down-Cycle Demand: The company's business model is fairly diversified from a product and geographic perspective and focuses on a chronic and critical care patient category. Fitch believes the critical nature of Baxter's global business should help support relatively stable cash flows during the pandemic. Standalone, Baxter's business maintains a narrower focus than its largest peers and targets renal (32% of fiscal 2020 total revenue), medication delivery (23%), pharmaceuticals (18%), nutrition (8%), advanced surgery (8%), acute therapies (6%), biopharmaceuticals (4%) and other (1%).
The company targets both mature and developing countries and generates 42% of its revenue in the
Commitment to New Products: Baxter is also focused on improving its global core portfolio, and undertook a portfolio rationalization. The company continues to reallocate its investments into higher-margin, faster-growing businesses and is focusing on material improvements to existing technologies and entirely new offerings. Investment spending will likely be divided between internal development and externally developed targets. Fitch expects near- and mid-term pipeline launches will continue to support low- to mid-single-digit growth over the forecast.
Solid FCF to Continue: Fitch anticipates that Baxter will continue to gradually improve its operating profile, driven by moderate organic growth supported by its product pipeline and recent acquisitions. Margins should gradually increase through favorable product mix shift, meaningful acquisition-related cost synergies 2023 and some normal cost rationalization. Resulting normalized FCF should grow from
Derivation Summary
Baxter is a large, diversified medical device firm focused on renal and hospital products. The company's products are used by hospitals, kidney dialysis centers, nursing homes, rehabilitation centers, doctors' offices and by patients at home under physician supervision. Although Baxter has global scale and reach, it is smaller and has a narrower focus than its largest medical device peers. Baxter is considered a leader in the categories in which it competes. Demand for the company's products is relatively reliable, although revenues are modestly sensitive to the macroeconomic environment through reimbursement rates (pricing) and, to a lesser extent, utilization.
Given Baxter's combination of assets, it has no direct rated comparator. The ratings of Baxter's medical device peers
Fitch applies parent subsidiary linkage to
Key Assumptions
Low-to-mid single digit reported revenue growth;
Gradual incremental improvements to EBITDA margins throughout forecast, due to operating leverage improving from normalized business demand during 2021, SGA costs returning to near-historical levels, mix shift to higher-margin products and operational efficiency improvements;
Cash dividends gradually and consistently increasing over time;
FCF of roughly
Total debt/EBITDA around 3.0x or below over the rating horizon.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
An upgrade is not currently anticipated.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
Total debt/EBITDA durably above 3.0x without the prospect for timely deleveraging.
For a 'BBB' rated issuer in the medical device and product sector, Fitch would generally consider the following rating sensitivities:
Total debt/EBITDA durably between 2.5x-3.0x;
FCF/total debt durably above 10%;
The RWN resolution will focus on proforma capital structure, plans to pay down debt and general capital deployment strategy, particularly within 24 months of the transaction.
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
Adequate Liquidity: FCF was approximately
Maturities are well laddered and Baxter's recent debt issuances provides the company the ability to pay down some debt in the near to intermediate term.
Issuer Profile
Baxter provides essential healthcare products to hospitals, kidney dialysis centers, nursing homes, rehabilitation centers, doctor's offices and by patients at home under physician supervision. Baxter manufactures products in over 20 countries and sells them in over 100.
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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