Fitch Ratings has downgraded
The Rating Outlook is Stable and the Rating Watch Negative has been removed from the ratings.
The downgrades are primarily driven by Fitch's expectation that leverage will remain elevated through 2025 and that debt repayment from the pending spin-off of its kidney care business is unlikely to reduce gross leverage to below 3.25x over the next 12 to 24 months, barring a high leverage point for the spinco or a meaningful outperformance in the remaining company's operating performance.
EBITDA leverage (gross debt/Fitch adjusted EBITDA) has sustained above Fitch's previous negative sensitivity of 3.0x since BAX's acquisition of
The 'BBB-' rating also considers BAX's reduced scale and diversification post the Kidney Co spinoff, partially offset by an improvement in margin profile.
Key Rating Drivers
Impact of the Kidney Co Spinoff: The Kidney Care business unit generated
In Fitch's view, the spinoff will negatively impact BAX's business profile through a reduction in scale and diversification, and a weakened overall market position, considering BAX's significant revenue contribution from renal care businesses and its strong historical market position and reputation in renal care. These weaknesses are partially offset by an expected improvement in EBITDA margin and FCF margin, given Kidney Care's lower operating margins, and Fitch's expectation that a leaner product portfolio may allow management to more efficiently execute on operation optimization, supply chain management, and core portfolio growth.
EBITDA Leverage to Remain Elevated: BAX's EBITDA leverage has remained above 5.0x since the
The lower than expected EBITDA and FCF resulted in elevation in EBITDA leverage, meaningfully delaying the company's deleveraging timeline.
Fitch's current forecast assumes EBITDA leverage to remain at 5.0x at year end 2023 and decline to 4.3x and 3.6x in 2024 and 2025, respectively. Fitch expects deleveraging in 2024 to be predominantly driven by debt reduction with reserved proceeds from the recently completed BPS sale and the pending Kidney Co spinoff, and 2025 to be driven largely by remaining proceeds from Kidney Co spinoff and incremental voluntary repayment. Assumed debt repayment is critical to the company's deleveraging below its new negative leverage sensitivity of 3.75x, commensurate with a 'BBB-' rating, over the next 12 to 24 months.
Diversification Supports Down-Cycle Demand: The company's business model is fairly diversified from a product and geographic perspective. Fitch believes the critical nature of BAX's global business should generally support relatively stable cash flows during economic downturns, albeit volatile in recent periods due to working capital swings and one-time expenses. BAX's business targets Medical Products and Therapies (34% of YTD2023 revenue), Kidney Care (30%) Healthcare Systems and Technologies (20%), Pharmaceuticals (15%) and other (1%).
Although the improvement in diversification from the
Near-term Volatilities in FCF: Fitch expects FCF will improve in 2023 and 2024 versus 2022 but remain depressed relative to historical (
Commitment to New Products: BAX is focused on improving its global core portfolio, and continuing to evaluate potential in its portfolio rationalization opportunities. The company continues to reallocate its investments into higher-margin, faster-growing businesses and is focusing on improvements to existing technologies and entirely new offerings. Fitch expects BAX to modestly increase R&D spending to restore growth to mid-single digits over the medium to longer term.
Derivation Summary
BAX is a large, diversified medical-device firm focused on a broad portfolio of essential healthcare 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. BAX is 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 hospital capex and, to a lesser extent, utilization.
Given the company's combination of assets, no single company competes with BAX in all of its businesses, but it faces substantial competition in each of its segments. The ratings of BAX's medical device peers
Parent-Subsidiary Linkage
Fitch takes a weak parent (
Key Assumptions
For modelling purposes, these assumptions assume Kidney Co spinoff completes on
Low single digit pro forma revenue growth;
EBITDA margins to improve over the rating horizon driven primarily by the spinoff of the lower margin Kidney Care businesses and, to a lesser extent, by operational efficiency improvement;
Right sizing of capex and common dividends post spinoff;
BPS sale proceeds, Kidney Co spinoff proceeds, and FCF predominantly deployed towards debt repayment;
No share repurchases or M&As assumed over the rating horizon.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
EBITDA Leverage durably below 3.25x;
--(CFO-Capex)/debt durably above 10%.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
EBITDA Leverage durably above 3.75x without the prospect for timely deleveraging;
--(CFO-Capex)/durably below 7.5%.
Liquidity and Debt Structure
Solid Liquidity: Liquidity is supported by cash on hand of
Debt Maturities: In
Issuer Profile
Summary of Financial Adjustments
EBITDA adjustments were made for asset and goodwill impairments, business optimization items, acquisition and integration costs, and divestiture related costs.
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
The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' 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. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit https://www.fitchratings.com/topics/esg/products#esg-relevance-scores.
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