Fitch Ratings has affirmed Covidien plc's (Covidien) ratings as follows:
--Issuer Default Rating (IDR) at 'A';
--Short-term IDR at 'F1';
--Commercial Paper Program at 'F1';
--Credit Facility at 'A';
--Senior Unsecured Notes at 'A'.
The Rating Outlook is Stable. The ratings apply to approximately $3
billion in debt outstanding as of Sept. 25, 2009.
Covidien's ratings are supported by the company's strong credit
statistics and operational performance. Leverage (total debt/operating
EBITDA) has continued to decline since the separation from Tyco
International Ltd. in 2007, reaching 1.1 times (x) for the 2009 fiscal
year (FY2009) while leverage on a net-debt basis declined to 0.6x. Fitch
expects leverage to remain below 1.5x times over the next few years,
although periodic increases are possible to fund strategic investments.
Free cash flow is also robust, with an 11% free cash flow margin
reported in FY2009, and Fitch expects free cash flow to be between
$1-1.5 billion annually over the next few years.
In addition to its strong credit profile, Covidien has demonstrated
operational stability in spite of the recession in 2009. Fitch believes
that Covidien is seeing results from its incremental investments in
sales, marketing, and innovation since the separation and Fitch expects
this trend to continue over the next few years. In addition, Fitch
believes that Covidien benefits from a diverse base of products and
markets as well as a focus on key, growing market areas. In FY2009,
Covidien reported 5% sales growth excluding the impact of foreign
exchange and the one-time benefit from oxycodone hydrochloride extended
release tablet sales pursuant to a legal settlement. However, Fitch
notes some pressure is possible in FY2010 due to competitive pressures,
increased generic competition and tough comparables, particularly in the
Pharmaceuticals segment.
Key ratings concerns include event risk, particularly the potential for
leveraging transactions as well as regulatory and legal uncertainty.
Covidien has been an active acquirer through the years, and Fitch
expects this to continue, with the potential for temporary increases in
leverage to fund such activities. In addition, Fitch believes Covidien
will continue to pursue shareholder-friendly activities including
dividends and share repurchases. These factors could put pressure on the
company's credit metrics in the future, although Fitch believes the
company would be willing and able to reduce leverage after any such
leveraging event.
Covidien's businesses are also subject to a high degree of regulatory
oversight which, although an effective barrier to entry, represents a
significant source of uncertainty. Healthcare reform in particular is a
significant unknown with both upside (increased market size) and
downside (industry taxation, decreased reimbursement, etc.) risks. In
addition, recent discussions centering on reducing the use of
acetaminophen and combination acetaminophen/narcotics products could
negatively impact the company's pharmaceuticals segment. (Covidien is
the world's largest manufacturer of acetaminophen.)
Covidien also remains jointly-and-severally liable for several legacy
tax and legal items dating to before the separation of Tyco
International into Covidien, Tyco International Ltd. and Tyco
Electronics Ltd. Although the bulk of these items have been resolved
with the $2.975 billion shareholder settlement in FY2007 (of which
Covidien's portion was $1.249 billion) there remains some uncertainty
related to remaining items, particularly tax obligations, that could
result in material cash outflows over the next several years.
Fitch notes that the obligor of Covidien's debt is Luxembourg-based
Covidien International Finance S.A., (CIFSA) an indirect, wholly-owned
subsidiary of Covidien plc. CIFSA directly or indirectly owns all of the
operating subsidiaries of Covidien, issues debt, and performs treasury
operations for Covidien, otherwise it conducts no independent business
operations of its own. In addition, all outstanding debt is fully and
unconditionally guaranteed by Covidien plc and Covidien Ltd. In June
2009, Covidien moved its headquarters from Bermuda to Ireland while
Covidien plc replaced Covidien Ltd. as the ultimate parent of the
corporation.
Debt at Sept. 25, 2009 included $2.75 billion in unsecured notes with
maturities ranging from 2010 to 2037 with $250 million due in October
2010. Covidien also has a $1.425 billion commercial paper program ($151
million outstanding at Sept. 25, 2009) that is backed by the company's
$1.425 billion unsecured revolving credit facility maturing in April
2012. Liquidity is provided by this facility, cash on hand ($1.5 billion
at Sept. 25, 2009) and free cash flow ($1.1 billion in FY2009). Fitch
expects liquidity to be robust over the next few years as free cash flow
remains between $1-1.5 billion annually for the next few years.