Moody's Investors Service confirmed the long-term and short-term debt ratings of American Home Products Corporation. The outlook for these ratings remains negative. Moody's rating actions follow the announcement that plaintiff lawyers and American Home have reached an agreement under which American Home will pay up to $3.75 billion (present value) over up to 16 years to settle diet-pill litigation involving its drugs Pondimin and Redux. American Home will take a $4.75 billion pre-tax charge in connection with the settlement, other judgements, and legal costs. Moody's said that based on the proposed settlement and the stretched payment structure for the settlement, American Home should be able to maintain adequate financial flexibility while managing the increased debt burden that will be required to fund these payments. American Home has progressively strengthened its financial condition in recent years by substantially reducing debt and leverage following its cash purchase of American Cyanamid in 1994.
Ratings confirmed with a negative outlook are:
American Home Products Corporation - A2 for notes, debentures, and industrial revenue bonds; (P)A2 for shelf registration of debt securities; and the company's Prime-1 for commercial paper.
American Cyanamid Company - A3 for industrial revenue bonds and VMIG-1 for guaranteed industrial revenue bonds.
AC Acquisition Company - Prime-1 for guaranteed commercial paper.
Moody's noted the announced settlement between plaintiff lawyers and American Home is subject to judicial approval and does not include individuals who suffered primary pulmonary hypertension, a rare but usually fatal lung condition. Furthermore, determination of the ultimate size of American Home's liability will also depend importantly on the number of "opt-outs" from the class-action settlement and the degree of success these individuals have in pursuing their cases. Moody's will continue to monitor developments with the aim of more accurately quantifying American Home's total liability. The process to reach a final settlement could take approximately two years. Should it appear that the company's liability will be significantly larger than anticipated to cause financial flexibility to become constrained, negative pressure could result on American Home's ratings. Therefore, the outlook remains negative.
Separately, American Home announced yesterday that it will take a $220 million third quarter charge for restructuring its Cyanamid agricultural business to improve efficiency. Management is evaluating strategic alternatives for the unit, which could include its sale or spin-off. Moody's will continue to monitor these developments as well.
Headquartered in Madison, New Jersey, American Home Products Corporation is a diversified manufacturer of pharmaceuticals, consumer products, and agricultural products.
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