Fitch Cuts Glaxo Default Rating To A- From A After Acquisitions

LONDON (Alliance News) - Fitch Ratings on Tuesday downgraded GlaxoSmithKline PLC's long-term ...

Alliance News 29 May, 2019 | 10:37AM
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LONDON (Alliance News) - Fitch Ratings on Tuesday downgraded GlaxoSmithKline PLC's long-term issuer default rating to A- from A as it expects Glaxo's leverage to remain high after recent acquisitions.

Fitch said the pharmaceutical company's outlook is Stable. Fitch also downgraded the senior unsecured rating on debt issued under GlaxoSmithKline Capital PLC and GlaxoSmithKline Capital Inc to A- from A.

Fitch explained its rationale, saying: "The downgrade reflects our expectation that GSK's leverage will remain high for an 'A' rated pharmaceutical company over 2019-2021, having increased well above the level consistent with its previous 'A' rating following recent acquisitions. Moreover, we expect free cash flow to be negative-to-break-even during the next two years as a result of GSK's generous dividend policy."

The credit rating agency forecasts Glaxo's funds from operations net leverage will peak just below 4.0 times at the end of 2019 due to the company's GBP3.9 billion acquisition of Tesaro Inc and negative-to-break-even free cash flow until 2020.

By 2021, Fitch predicts progressive develeraging to 3.5 times, aided by increased earnings before interest, taxation, depreciation and amortisation, plus up to GBP3.5 billion of net proceeds from disposals and "probably further material deleveraging in 2022".

Fitch said Glaxo's net leverage was higher than the 3.0 times threshold at the end of 2018 - at 3.5 times - as a result of its GBP9.2 billion cash acquisition of Novartis's 37% stake in their consumer health joint venture.

Glaxo and Pfizer Corp are now planning an all-equity combination of their consumer heath divisions, with Glaxo's stake to be 68%. The resultant new consumer healthcare joint venture will be created in the second half of 2019 and will have consolidated sales of approximately GBP10 billion. This joint venture is then planned to spin out and list separately on the London Stock Exchange within three years of its formation.

As for the dividend, Fitch said Gaxo has a lower funds from operations margin than peers such as Novartis AG, Pfizer, and Merck & Co Inc due to high dividends paid to non-controlling interests - as well as its consumer healthcare operations, which dilute its margin.

"GSK's slightly negative [free cash flow] generation caused by its generous dividend policy is unusual in the 'A' category and, with the exception of AstraZeneca PLC, compares negatively with pharma peers in the 'A' and 'BBB' categories," said Fitch.

Fitch said Glaxo would likely return to an A rating if there is permanent de-leveraging with funds from operations-adjusted net leverage kept consistently below 3.0 times.

Shares in Glaxo were down 1.0% at 1,531.40 pence on Wednesday morning.

By Anna Farley; annafarley@alliancenews.com

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Securities Mentioned in Article
Security Name Price Change (%) Morningstar Rating
GlaxoSmithKline PLC 1,660.40 GBX -0.28
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