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Rating Action:

MOODY'S ASSIGNS Ba3 RATING TO CONVERTIBLE SUBORDINATED NOTES OF AMERISOURCE HEALTH CORP.; Ba2 SENIOR IMPLIED RATING

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 increase.

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 Internet initiatives.

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 reduce leverage.

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 surveys.

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.

New York
Pamela Stumpp
Senior Vice President
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: (212) 553-0376
SUBSCRIBERS: (212) 553-1653

New York
Russell Pomerantz
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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