The bonds will trade tight in HY after the initial shakeout, but spreads will widen. It will be a welcome addition to the index given what's available in the sector and a big part of it. The two notch downgrade and liquidity rating of 3 out of 4 is harsh and reflects the analyst's lack of experience (amazing they would assign someone so junior and green to this company, but that's another conversation).
Looks like I won't get the pullback I was hoping for in the stock, but it should drop if the rest of the market does so maybe there will be another opportunity.
~~Moody's Investors Service ("Moody's") downgraded the senior unsecured ratings of Teva Pharmaceutical Industries, Ltd ("Teva") and its subsidiaries to Ba2 from Baa3. Moody's also assigned a Ba2 Corporate Family Rating, Ba2-PD Probability of Default Rating, and SGL-3 Speculative Grade Liquidity Rating. The rating outlook is stable. This action concludes the rating review initiated on December 14, 2017.
* "The downgrade of Teva's ratings to speculative grade reflects the challenge
of managing its significant debt burden while facing a prolonged period of
earnings erosion," commented Morris Borenstein, Moody's Assistant Vice
President. "While Teva's cost restructuring program will help to partially
offset declines, execution risk is high. In addition, we believe earnings
declines from Copaxone and its US generics business will be severe, and that
meaningful deleveraging to under 4 times gross debt/EBITDA will take several
years to achieve," added Borenstein.
* Teva's Ba2 Corporate Family Rating reflects its significant scale in both
generic and branded drugs, its global diversity, and its position as the
world's largest generic drug company. Teva has the largest generic pipeline
in the industry, including first-to-file opportunities. This pipeline,
together with Teva's branded pipeline, will support revenue growth over the
long term. Still, Moody's expects base earnings and cash flow to severely
contract over the next two years due to headwinds in its US generics segment
and generic competition on its largest earnings driver, Copaxone.
* Teva's credit profile is constrained by high financial leverage, which
Moody's does not expect will fall below 4 times gross debt/EBITDA until after
2019. The company has limited financial flexibility and is facing significant
debt maturities.
* Teva is taking significant actions to reduce its cost base by $3 billion over
the next two years, which will shore up profitability and support
deleveraging. Moody's expects that Teva will use the majority of its free
cash flow to reduce debt. It is critical that the cost restructuring plan
boost cash generation enough to keep pace with maturities and to ultimately
reduce leverage.
* While Moody's believes that Teva's cost base will come down, the timing
through 2019 is uncertain. Moody's views Teva's cost restructuring plan and
reorganization as aggressive and it raises the risk for business disruptions.
At the same time, potential portfolio rationalizations in the generics
segment could harm Teva's relationships with customers.
* Teva's SGL-3 Speculative Grade Liquidity Rating reflects an adequate
liquidity profile. Teva has roughly $7.5 billion of debt maturing through
2019. Beyond previously announced divestiture proceeds, Moody's projects free
cash flow of around $2.5 billion which is insufficient to cover all of Teva's
2018 debt maturities without moderate refinancing. Moody's does not assume
any asset sales, although the company has used asset sales in the past to
reduce debt. The credit agreements contain financial covenants including
minimum interest coverage of 3.50 times and maximum net debt/EBITDA of 5.00
times declining to 4.75 times beginning in 2019 with further step downs.
Moody's believes that the company will likely breach the leverage covenant in
the first quarter 2018 unless it amends its credit agreements. Teva has a
$4.5 billion revolving credit facility expiring in 2020 that is undrawn,
although access is limited due to covenant concerns.
* The rating outlook is stable reflecting Moody's view that Teva will be
focused on debt repayment. It also reflects Moody's expectation that credit
metrics will be weak over the next 18 months before realized cost savings
drive improvement.
* Moody's rates all of Teva's debt Ba2, the same as its Ba2 Corporate Family
Rating. All of Teva's debt is unsecured and unconditionally guaranteed by
Teva Pharmaceutical Industries Limited, the parent company.
* Teva's ratings could be upgraded if the company materially improves its
operating performance and liquidity, and is able to more than offset price
erosion with new product launches. Teva would also need to improve its growth
trajectory, notably supported by successful product launches. Additionally,
Teva would need to sustain debt/EBITDA below 4.5 times before Moody's would
consider an upgrade.
* The ratings could be downgraded if Teva's operating performance remains weak,
or if it encounters operating disruptions while implementing its major cost
restructuring plan. Ratings could also be downgraded if free cash flow
remains weak for an extended period of time, or if Moody's expects
debt/EBITDA to remain above 5.0 times. Failure to receive covenant relief
under its credit agreements, or a failure to repay or refinance upcoming debt
maturities well in advance could also lead to a downgrade.
January 12th, 2018 at 2:09 pm
The bonds will trade tight in HY after the initial shakeout, but spreads will widen. It will be a welcome addition to the index given what's available in the sector and a big part of it. The two notch downgrade and liquidity rating of 3 out of 4 is harsh and reflects the analyst's lack of experience (amazing they would assign someone so junior and green to this company, but that's another conversation).
Looks like I won't get the pullback I was hoping for in the stock, but it should drop if the rest of the market does so maybe there will be another opportunity.
~~Moody's Investors Service ("Moody's") downgraded the senior unsecured ratings of Teva Pharmaceutical Industries, Ltd ("Teva") and its subsidiaries to Ba2 from Baa3. Moody's also assigned a Ba2 Corporate Family Rating, Ba2-PD Probability of Default Rating, and SGL-3 Speculative Grade Liquidity Rating. The rating outlook is stable. This action concludes the rating review initiated on December 14, 2017.
* "The downgrade of Teva's ratings to speculative grade reflects the challenge
of managing its significant debt burden while facing a prolonged period of
earnings erosion," commented Morris Borenstein, Moody's Assistant Vice
President. "While Teva's cost restructuring program will help to partially
offset declines, execution risk is high. In addition, we believe earnings
declines from Copaxone and its US generics business will be severe, and that
meaningful deleveraging to under 4 times gross debt/EBITDA will take several
years to achieve," added Borenstein.
* Teva's Ba2 Corporate Family Rating reflects its significant scale in both
generic and branded drugs, its global diversity, and its position as the
world's largest generic drug company. Teva has the largest generic pipeline
in the industry, including first-to-file opportunities. This pipeline,
together with Teva's branded pipeline, will support revenue growth over the
long term. Still, Moody's expects base earnings and cash flow to severely
contract over the next two years due to headwinds in its US generics segment
and generic competition on its largest earnings driver, Copaxone.
* Teva's credit profile is constrained by high financial leverage, which
Moody's does not expect will fall below 4 times gross debt/EBITDA until after
2019. The company has limited financial flexibility and is facing significant
debt maturities.
* Teva is taking significant actions to reduce its cost base by $3 billion over
the next two years, which will shore up profitability and support
deleveraging. Moody's expects that Teva will use the majority of its free
cash flow to reduce debt. It is critical that the cost restructuring plan
boost cash generation enough to keep pace with maturities and to ultimately
reduce leverage.
* While Moody's believes that Teva's cost base will come down, the timing
through 2019 is uncertain. Moody's views Teva's cost restructuring plan and
reorganization as aggressive and it raises the risk for business disruptions.
At the same time, potential portfolio rationalizations in the generics
segment could harm Teva's relationships with customers.
* Teva's SGL-3 Speculative Grade Liquidity Rating reflects an adequate
liquidity profile. Teva has roughly $7.5 billion of debt maturing through
2019. Beyond previously announced divestiture proceeds, Moody's projects free
cash flow of around $2.5 billion which is insufficient to cover all of Teva's
2018 debt maturities without moderate refinancing. Moody's does not assume
any asset sales, although the company has used asset sales in the past to
reduce debt. The credit agreements contain financial covenants including
minimum interest coverage of 3.50 times and maximum net debt/EBITDA of 5.00
times declining to 4.75 times beginning in 2019 with further step downs.
Moody's believes that the company will likely breach the leverage covenant in
the first quarter 2018 unless it amends its credit agreements. Teva has a
$4.5 billion revolving credit facility expiring in 2020 that is undrawn,
although access is limited due to covenant concerns.
* The rating outlook is stable reflecting Moody's view that Teva will be
focused on debt repayment. It also reflects Moody's expectation that credit
metrics will be weak over the next 18 months before realized cost savings
drive improvement.
* Moody's rates all of Teva's debt Ba2, the same as its Ba2 Corporate Family
Rating. All of Teva's debt is unsecured and unconditionally guaranteed by
Teva Pharmaceutical Industries Limited, the parent company.
* Teva's ratings could be upgraded if the company materially improves its
operating performance and liquidity, and is able to more than offset price
erosion with new product launches. Teva would also need to improve its growth
trajectory, notably supported by successful product launches. Additionally,
Teva would need to sustain debt/EBITDA below 4.5 times before Moody's would
consider an upgrade.
* The ratings could be downgraded if Teva's operating performance remains weak,
or if it encounters operating disruptions while implementing its major cost
restructuring plan. Ratings could also be downgraded if free cash flow
remains weak for an extended period of time, or if Moody's expects
debt/EBITDA to remain above 5.0 times. Failure to receive covenant relief
under its credit agreements, or a failure to repay or refinance upcoming debt
maturities well in advance could also lead to a downgrade.