Fitch Affirms AmerisourceBergen at 'A-'; Outlook Negative

Fitch Ratings has affirmed the ratings for AmerisourceBergen Corp. (NYSE: ABC), including the Long-term Issuer Default Rating (IDR) at 'A-' and the Short-term IDR at 'F2'. The Rating Outlook is Negative.

A full list of rating actions, which apply to approximately $3.9 billion of debt outstanding at Sept. 30, 2015, follows at the end of this release.

KEY RATING DRIVERS

STABLE OPERATIONS, LOW MARGINS

The credit profiles of ABC and its peers benefit from stable operating profiles and consistent cash generation. Steady pharmaceutical demand, an oligopolistic drug distribution industry in the U.S. and, for the most part, in Western Europe, and relative insulation from most drug pricing and regulatory pressures, support strong ratings despite very low margins. ABC's long-term relationship with Walgreens provides an added element of meaningful stability.

EXTENDED PERIOD OF HIGH LEVERAGE

$2.65 billion of debt issued during fiscal 2014 - 2015 for ABC's special share repurchase program and the acquisitions of MWI and PharMEDium are contributing to an extended period of high debt leverage. Gross debt/EBITDA of 2.1x at Sept. 30, 2015 is expected to moderate as strong FCF is used to repay debt during fiscal 2016.

SOLID LIQUIDITY, CASH GENERATION

ABC maintains a strong liquidity position and strong access to capital markets, which provides ample flexibility for the firm to fund significant working capital and other cash requirements. Cash generation is stable and strong, particularly given favorable working capital dynamics related to the growth of generic distribution volumes in fiscal 2015.

NARROW FOCUS, BUSINESS CONCENTRATION

ABC's business is narrowly focused on the distribution of pharmaceutical products and related services. Furthermore, nearly half of sales are to the firm's two largest customers: Walgreens Alliance Boots Corp. (NYSE: WBA; 30% of 2015 sales) and Express Scripts Holding Corp. (NYSE: ESRX; 16%).

HEDGING STRATEGY EFFECTIVENESS UNCERTAIN

ABC has nearly completed its strategy to offset the expected dilutive impact of the pending warrants exercise by Walgreens in 2016 and 2017. However, the ultimate effectiveness of ABC's hedging strategy is at this time uncertain, as stock price fluctuations could change hedging effectiveness.

LIMITED U.S. GROWTH, EVENT RISK

Fitch believes there are limited growth opportunities in the traditional U.S. drug distribution space. Growth opportunities are more robust for the MWI and PharMEDium platforms, but represent a relatively small portion of ABC as a whole. As a result, and now more so considering ABC's alignment with Walgreens, Fitch expects ABC to pursue both organic and inorganic growth in service-related and non-U.S. markets over the intermediate-to-longer term.

RATING SENSITIVITIES

ABC currently has limited flexibility at its current ratings. Maintenance of the 'A-' long-term ratings expects the reduction of gross debt/EBITDA to 1.3x-1.4x by fiscal year-end 2017, accompanied by steady funds from operations (FFO) in excess of $800 million annually. Fitch notes that this de-leveraging timeframe may run into fiscal 2018. But ABC's historical commitment to operating with low debt leverage and responsible allocation of capital, with strong cash generation and growing EBITDA margins, support the current 'A-' ratings. As de-leveraging is achieved, Fitch will consider revising the Rating Outlook to Stable.

Negative ratings momentum could be caused by greater and more direct pricing pressures than Fitch currently expects and/or by a transaction which illustrates a departure from ABC's traditional commitment to its core drug distribution business or makes the aforementioned de-leveraging target unattainable. Fitch notes the risks associated with ABC's alignment with Walgreens, including the possibility for incrementally more cash needed to fund hedging/anti-dilution transactions.

An upgrade to 'A' is not expected over the ratings horizon. Because of the business's low margins, Fitch believes ABC's management would need to commit to operating with gross debt leverage below 0.75x, accompanied by increased profit margins and cash flows, to consider an upgrade to 'A'. Fitch does not expect ABC to commit to operating with such low leverage in the near-to-intermediate term.

LIQUIDITY POSITION IS STRONG

ABC's liquidity position is strong, comprising $2.1 billion of cash, an undrawn $1.4 billion unsecured revolver due November 2020, and a $950 million accounts receivable facility due November 2018, at Sept. 30, 2015. Fitch considers all cash as Readily Available. Management seeks to keep ample cash on the balance sheet to fund ongoing operations, including large day-to-day working capital swings. Access to external liquidity is adequate.

Fitch expects ABC to use cash flows to repay about $625 million of term loans in 2016 and its $600 million of notes maturing in 2017. Additional amounts under its term loan due November 2020 may also be repaid in 2017 in order to meet debt leverage targets. Fitch expects FCF to outpace the aforementioned debt repayments, leaving flexibility for more debt repayment, M&A, or additional hedging, if necessary.

ALIGNMENT WITH WALGREENS STILL NET POSITIVE, WITH SOME CONCERNS

Since announcing the long-term alignment with Walgreens in 2013, ABC has spent roughly $2.75 billion related to its attempt to offset anticipated dilution connected to the pending warrant exercises. This amount compares to the roughly $5.1 billion spent by McKesson to acquire Celesio, and the quarterly payments made by Cardinal Health to CVS Health of $25.6 million to participate in the Red Oak purchasing JV. These represent the three major recent consolidation plays among drug channel participants.

On balance, Fitch sees ABC's alignment with Walgreens as a net positive, adding a stable "anchor" customer with a long-term interest in the success of ABC (re: equity ownership) and meaningfully improved generic purchasing power. However, Fitch remains concerned about possible ownership dynamics and at least the perception of customer satisfaction/competition issues among other ABC customers. ABC's ability to renew upcoming contracts, including with Express Scripts and Kaiser Permanente, may shed light on ABC's operational performance as it pertains to customers other than Walgreens in calendar 2014 - 2015.

Fitch does not believe there are strong enough implicit / operational guarantees between ABC and Walgreens at this time to have a material impact on ABC's credit profile. The relationship may develop over time such that the relative strength of each company's credit profile could impact the credit ratings of the other, particularly as Walgreens may rely on ABC for distribution of more than just prescription pharmaceuticals and as Walgreens may grow its ownership of ABC to 30%, with the appointment of 2 BOD members.

IMPACT OF CONSOLIDATING GENERIC DRUGMAKERS

Consolidation, while present in nearly every area of healthcare, is especially torrid among manufacturers of generic drugs. Most notably, Teva Pharmaceutical Industries Ltd., the world's largest generic drugmaker, agreed in July 2015 to acquire the generic drug business of Allergan plc, also a top-4 global generic drugmaker. The effect of this very large-scale merger is at this time uncertain, as Fitch tends to think there is a point of diminishing returns as it pertains to generic drug pricing negotiations. However, the continued consolidation of mid-tier generic drug firms may incrementally push back on more favorable pricing and/or working capital terms achieved recently by the world's largest buying consortiums.

KEY ASSUMPTIONS

--Top line growth in the mid- to high-single digits in 2016-2017, owing to solid organic growth plus the addition of MWI and PharMEDium.

--Solid margin expansion from cost rationalization, growth of generic drug volumes, and the addition of MWI and PharMEDium, leading to EBITDA approaching and possibly exceeding $2 billion by 2017.

--Strong FCF approaching $2.5 billion in 2016, benefiting from favorable working capital impact due to growth in generic drug volumes.

--Repayment of the remaining $500 million under the MWI term loan and $125 million under the PharMEDium term loan, drawn on in Nov. 2015. Repayment of the $600 million notes due 2017 with cash and $125 million under the PharMEDium term loan in 2017. Repayment of the remaining PharMEDium term loan ($750 million) in 2018.

--Forecasts for 2016-2017 do not assume the addition of the Rite Aid book of business for ABC, though Fitch thinks it is likely that ABC does eventually provide distribution to legacy Rite Aid stores in the medium term.

--Gross debt/EBITDA lingers just above the 1.4x Rating Sensitivity in fiscal 2017.

Fitch affirms the following ratings:

AmerisourceBergen Corp.

--Long-term IDR at 'A-';

--Short-term IDR at 'F2';

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

--Senior unsecured notes 'A-';

--Commercial paper at 'F2'.

The Rating Outlook is Negative.

Date of Relevant Rating Committee: Jan. 20, 2016.

Additional information is available on www.fitchratings.com.

Applicable Criteria

Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 17 Aug 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869362

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=998194

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=998194

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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