Posted in Medical Device Business by Chris Newmarker and Brian Buntz on January 28, 2015
Medtronic is expected to enjoy lower corporate taxes now that it has moved its official headquarters from the U.S. to Ireland through its merger with Covidien. But there is one way the move has not been so fortunate: Medtronic’s credit rating, which has apparently taken a hit due the billions borrowed to finance the deal.
The rating agencies Fitch Ratings, Moody's Investors Service, and Standard & Poor have all downgraded the firm’s credit rating.
In a short press release, Fitch explains that it has notched Covidien's Issuer Default Rating (IDR) to 'A-' from 'A.'
Moody has downgraded the firm’s ratings from A2 to A3, its short-term rating from from Prime-1 to Prime-2, and classified its debt outlook of the company as “negative.”
Moody’s explained in the release that the negative outlook “reflects challenges Medtronic will face in deleveraging.” Moody’s cited Medtronic’s limited free cash flow after funding shareholder commitments, the potential for more acquisitions, and healthcare headwinds including pricing pressure and weak hospital utilization trends.
“If Medtronic does not deleverage as planned and Moody's believes the company will not sustain debt/EBITDA below 3.0 times, the ratings could be downgraded further. Given relatively high initial leverage, Moody's is unlikely to consider an upgrade in the near to medium term,” Moody’s said.
Finally, Standard & Poor also reduced its corporate credit rating for the company, reducing it from ‘AA-’ to ‘A.’ The agency, however, gives the company a stable outlook.
Interestingly, Morningstar was more upbeat about the merger, even giving Medtronic an “A” credit rating, explaining that it believes the company is at a low risk for defaulting on its debt. It was, however, less upbeat about the company’s stock, giving it a two-star rating on a scale of five.
Earlier this year, the Obama administration made it harder for Medtronic to see tax benefits from moving its official headquarters from Minnesota to Ireland through the merger. Medtronic—which had been reportedly looking to draw on its billions in foreign reserves to help pay for the deal interest-free—instead opted to use approximately $16 billion in external financingto complete the deal--which ended up being $48 billion when it closed this week.
Medtronic and Covidien officials have maintained all along that the merger was highly strategic. (Minnesota is even expected to gain jobs, with Medtronic’s operational headquarters continuing to be based outside of Minneapolis.)
"This proposed acquisition was conceived and undertaken for strategic reasons and is intended to create a company that can treat more patients, in more ways and in more places around the world," Omar Ishrak, chairman and CEO of Medtronic, said at one point.
