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04 Dec 2000
MOODY'S ASSIGNS Ba3 RATING TO CONVERTIBLE SUBORDINATED NOTES OF AMERISOURCE HEALTH CORP.; Ba2 SENIOR IMPLIED RATING
Approximately US$ 200 Million of Debt Securities Affected.
New York, December 04, 2000 -- Moody's Investors Service assigned a Ba3 rating to the proposed $200
million convertible subordinated note issue, due 2007, (the
"Notes") of AmeriSource Health Corp. ("AmeriSource"). AmeriSource
conducts operations through its wholly-owned operating subsidiary,
AmeriSource Corporation. The Note proceeds will be used by the
operating subsidiary to refinance outstanding debt and for working capital
as well as general corporate purposes. Moody's has also assigned
a senior implied rating of Ba2 to AmeriSource. The outlook is stable.
The ratings reflect the company's moderate leverage, the highly
competitive nature of the wholesale pharmaceutical distribution industry
and the concentration of sales to the Federal Government. The ratings
also consider other challenges including the company's ability to manage
working capital, maintain margins and successfully continue its
selective acquisition strategy.
Positive factors supporting the ratings include the company's consistently
improving financial trends and credit profile, its high rankings
in customer satisfaction surveys and its long-tenured management
team with a focus on fiscal management. Moody's gains additional
comfort from the demographic trends within the industry.
AmeriSource operates under a leveraged environment. Debt/EBITDA
for FYE 2000 was 1.9 times, with debt/book capital for the
same period at 59%. Interest coverage (EBITDA-capex/interest)
was adequate at 4.8 times. Since the Note proceeds will
be used to refinance existing debt, leverage is not expected to
Competition in the wholesale pharmaceutical distribution industry is intense.
AmeriSource faces numerous competitors, including three national
distributors significantly larger than the company. The company's
thin gross margins have eroded over the past few years and the company
expects further erosion going forward due to both a change in its customer
mix (to lower margin institutional accounts) and competitive pricing.
Working capital issues have also increased cash flow volatility.
Historically, the company has not relied heavily on speculative
buying. As margin pressures continue, we expect that this
trend may change, creating more volatility in working capital.
Moody's remains concerned over working capital issues and its impact on
cash flows for the pharmaceutical distribution industry in general.
Additionally, the industry faces margin pressures fueled by changes
experienced by both its customers and vendors such as consolidation,
prospects of a Medicare drug benefit program, greater regulatory
oversight and uncertainties associated with both customer and vendor-based
The company's acquisitive strategy is another element of concern.
AmeriSource is expected to seek opportunities to acquire other regional
wholesalers and providers of services to the industry. This strategy
may result in integration risks and may reduce cash flow available to
Moody's is also concerned over the concentration of sales. For
FYE 2000, the Veterans Administration accounted for 19% of
sales. The company also has significant relationships with GPOs.
As a mitigant, Moody's notes that the current contract with the
VA, which has already been rolled-over twice, will
not be up for renewal until April 2004. Furthermore, the
impact from the loss of a GPO contract may be limited since the company
deals with each member hospital individually.
Supporting the ratings, Moody's notes that the company's performance
has been consistently strong over the past several years. As a
result of organic growth and acquisitions, the company's sales have
increased 40% from 1997 to 2000 ($8.3BN to $11.6BN)
with EBITDA growing 45% during the same period ($150MM to
$217MM). The company's focus on operating efficiencies has
enabled it to maintain operating margins at approximately 1.7%
(FYE 2000) despite a decline in gross margins from 4.9%
for FYE 1997 to 4.5% for FYE 2000. Over the same
period, cash flow from operations, while volatile, has
enabled the company to reduce debt from $601MM to $413MM.
The company's conservative approach to managing debt and its favorable
operating trends have resulted in an improved credit profile. Debt/EBITDA
has decreased from 4.0 times for FYE 1997 to 1.9 times for
FYE 2000. At the same time, interest coverage (EBITDA/interest)
has increased from 3.5 times to 5.2 times. Moody's
anticipates continued improvements going forward.
Moody's expects that the company will benefit from certain positive trends
in the industry. Demographic trends are favorable and because pharmaceutical
therapies are cost efficient, utilization is expected to increase.
Additionally, Moody's notes that the company has achieved high rankings
in terms of customer satisfaction as evidenced from several third party
Senior management has had a long history with the company. Four
of the five members of the senior management team have an average of 14
years experience with the company. Management has a concise strategy
for growth and adheres to focused financial objectives.
The Notes will be issued at the holding company level (AmeriSource) and
will be guaranteed by the operating company (AmeriSource Corporation).
The guarantee will be subordinate to all senior debt of the operating
company. Therefore, the rating on the Notes reflects the
subordination to outstanding senior debt of the operating company of approximately
$220 million, which is currently secured by all assets of
the operating company. Moody's expects the collateral securing
the senior debt to be released after the first quarter 2001 results are
published as we anticipate that the company will achieve certain leverage
hurdles as set forth in its credit agreement.
Moody's also assigned a senior unsecured issuer rating of B1 to AmeriSource
Health Corp., the holding company.
AmeriSource, headquartered in Valley Forge, PA, through
its direct wholly-owned subsidiary, AmeriSource Corporation,
is the fourth largest full-service wholesale distributor of pharmaceutical
products and related health care services in the United States.
Senior Vice President
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: (212) 553-0376
SUBSCRIBERS: (212) 553-1653
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: (212) 553-0376
SUBSCRIBERS: (212) 553-1653
No Related Data.
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