Fitch Places AmerisourceBergen's Long-term Ratings on Negative Watch

Fitch Ratings has placed the long-term ratings of AmerisourceBergen Corp. (NYSE: ABC), including the Issuer Default Rating (IDR), on Rating Watch Negative. The short-term 'F2' ratings are affirmed. A full list of rating actions, which apply to $2 billion of outstanding debt as of Sept. 30, 2014, follows at the end of this release.

The rating actions follow ABC's announced acquisition of MWI Veterinary Supply, Inc. (NYSE: MWI) for approximately $2.5 billion. MWI is the largest distributor of animal health pharmaceuticals and supplies in the U.S. and the only pure play national player.

RATING DRIVERS

--The deal is strategically compelling. Relative to ABC's current core businesses, animal health is generally categorized by more favorable pricing dynamics and stronger growth prospects. The acquisition of MWI provides an important medium- to longer-term growth opportunity for ABC, especially related to production animals in developing markets.

--Debt leverage of 1.4x at Sept. 30, 2014 is already elevated relative to ABC's current 'A-' ratings. Additional ratings pressure will result from the $2 billion of planned new debt, effectively doubling ABC's total debt balance. Ample de-leveraging in the 18-24 months following the deal is possible but will be predicated on relatively strong margin expansion and cash generation assumptions in fiscal 2015 and 2016.

--Fitch does expect improving margins and robust cash generation for ABC in fiscal 2015 stemming from a full year of Walgreens' generic drug distribution volumes and continued favorable drug pricing trends. Fitch will review its expectations for profitability and cash generation relative to cash outflows required to offset dilution related to the Walgreens warrants and the $500 million May 2017 note maturity during the time leading up to the deal close.

--Fitch views favorably ABC's alignment with Walgreen Co. (Walgreens) and Alliance Boots GmbH, and the process to align the firms seems to have gone well so far. Fitch expects the relationship will drive some top-line growth, stronger cash flows, improved stability, and incremental margin expansion opportunities over the ratings horizon, despite the significant drop in profit margins and material cash outflows for working capital initially.

--U.S. drug distributors maintain stable operating profiles due to the industry's oligopolistic nature and steady pharmaceutical demand. Drug distribution, though low margin, is relatively insulated from pricing and regulatory pressures faced by other areas of healthcare in the U.S.

RATING SENSITIVITIES

Maintenance of ABC's current 'A-' ratings will require Fitch's expectation that gross debt/EBITDA of 1.3x or below will be achieved within approximately 18-24 months of the deal's close. A one-notch downgrade could result if Fitch concludes that this target is not achievable. Importantly, the de-leveraging timeframe will be lengthened to include the repayment of the $500 million May 2017 notes.

Fitch thinks such de-leveraging is possible, but with only $1 billion of prepayable debt will likely require relatively strong margin expansion over this timeframe. De-leveraging will be facilitated by ample FCF applied to the repayment of the proposed term loan and ABC's $500 million of notes that mature in May 2017. If the ratings are affirmed, flexibility will be very limited over this period.

Other negative ratings momentum could be caused by greater and more direct pricing pressures than Fitch currently expects and/or by a transaction which drives leverage sustainably above 1.3x or that illustrates a material departure from ABC's traditional commitment to its core drug distribution business. Fitch notes the risks associated with ABC's alignment with Walgreens-AB, including possible cash outflows associated with working capital or hedging/anti-dilution transactions. But Fitch does not expect these risks to precipitate a negative rating action over the ratings horizon.

An upgrade to 'A' is not expected over the ratings horizon. Because of the business's inherent low margins, Fitch believes ABC's management would need to commit to operating with gross debt leverage below 0.75x to achieve an upgrade to 'A'. Fitch does not expect ABC to commit to operating with such low leverage in the near to intermediate term.

Fitch has placed the following ratings for ABC on Rating Watch Negative:

--Long-term IDR 'A-';

--Senior unsecured bank facility rating 'A-';

--Senior unsecured notes rating 'A-'.

Fitch has affirmed the following ratings for ABC:

--Short-term IDR 'F2';

--Commercial paper rating 'F2'.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'Fitch Affirms AmerisourceBergen at 'A-'; Outlook Stable' (Sept. 10, 2014);

--'Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage' (May 28, 2014);

--'Fitch Rates AmerisourceBergen's Proposed $1B Bond Offering 'A-'; Outlook Stable' (May 19, 2014);

--'Trekking the Path to Biosimilars - The Destination' (Oct. 4, 2013);

--'Trekking the Path to Biosimilars - Forging Ahead' (Aug. 5, 2013);

--'Vital Signs - Currents in the Drug Channel' (Podcast) (April 25, 2013);

--'Navigating the Drug Channel - Drug Distributors: A Deeper Dive' (April 24, 2013).

Applicable Criteria and Related Research:

Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749393

Trekking the Path to Biosimilars -- The Destination

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=719802

Vital Signs -- Currents in the Drug Channel

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=707243

Navigating the Drug Channel -- Drug Distributors: A Deeper Dive

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=706690

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=967535

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