Fitch Ratings announces Covidien rating outlook stable

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.


Covidien plc


The opinions expressed here are the views of the writer and do not necessarily reflect the views and opinions of News Medical.
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