DBRS Confirms McKesson Corporation at BBB (high)

DBRS Limited (DBRS) has today confirmed the Issuer Rating and Senior Unsecured Debt rating of McKesson Corporation at BBB (high); the trends are Stable. The confirmation reflects McKesson’s deleveraging efforts, in line with DBRS expectations, since the acquisition of Celesio, which closed on February 6, 2014, as well as solid operating performance, particularly in its North American business in F2015.

DBRS has also discontinued the Commercial Paper rating of McKesson Canada. The discontinuation is based on the fact that the Company has no commercial paper outstanding issued by McKesson Canada and has no current plans to use commercial paper out of McKesson Canada going forward.

DBRS believes that McKesson’s earnings profile will remain stable over the near to medium term at a level considered strong for the current BBB (high) rating. Revenue is expected to grow in the mid-single digits per year over the medium term. Revenue growth in the near term is expected to be driven by organic growth in the North American distribution and Medical-Surgical businesses, while the International business is expected to be relatively flat year over year, and Technology Solutions top-line will decline in the mid-single digits as a result of weakening in a product line and the planned sale of another. EBITDA margins should improve modestly in the near term driven by improvements coming from each of the business segments. Over the medium term, McKesson’s EBITDA margins will benefit from synergies related to the acquisition of Celesio expected to be achieved by F2019 as well as from the establishment of its London sourcing office. As such, DBRS expects EBITDA will grow in the mid-single digit range in the near term and toward the $4.5 billion level in the medium term.

McKesson’s financial leverage is expected to continue to decline as the Company uses free cash flow to repay maturing debt as part of its deleveraging plan subsequent to the acquisition of Celesio. Cash flow from operations before changes in working capital should remain in the $3.5 billion to $3.7 billion range in F2016, while capex (including capitalized software expenditures) is expected to increase above the $600 million level, reflecting increased investment in Celesio, including refreshing its retail store base. DBRS expects that the Company will continue to grow its dividend consistently over the medium term. McKesson is expected to use cash-on-hand and free cash flow generated to repay near-term debt maturities, invest in growth organically and to maintain flexibility for further acquisition opportunities. DBRS notes that McKesson is also expected to maintain financial flexibility in order to complete the possible acquisition of the remaining outstanding shares of Celesio (valued at nearly $1.4 billion based on balance-sheet liability). Balance-sheet debt should therefore decline notably in F2016, as McKesson repays approximately $1.5 billion of upcoming debt maturities. Combined with modest growth in earnings, this will result in improved credit metrics (i.e., lease-adjusted debt-to-EBITDAR toward 2.5 times (x), lease-adjusted EBITDA coverage toward 10.0x). Should the Company successfully delever beyond the levels indicated (i.e., lease-adjusted debt-to-EBITDAR toward 2.0x) and operating performance remain solid over the medium term, the Company’s financial management intentions (including repayment or refinancing of maturing debt, any debt financed acquisitions and/or share repurchases) will determine whether a positive rating action will result.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link to the right under Related Research or by contacting us at info@dbrs.com.

The applicable methodologies are Rating Companies in the Merchandising Industry, DBRS Criteria: Guarantees and Other Forms of Explicit Support, DBRS Criteria: Commercial Paper Liquidity Support for Non-Bank Issuers, which can be found on our website under Methodologies.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.