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Rating Action:

Moody's affirms Bayer's A3 ratings; changes outlook to stable from positive

08 May 2014

London, 08 May 2014 -- Moody's Investors' Service has today affirmed the senior unsecured A3/P-2 ratings of Bayer AG ("Bayer" or "the Company") and changed the outlook on all ratings from positive to stable. The rating action follows the company's announcement of USD14.2 billion cash acquisition of the consumer care business from the US-based Merck&Co ("Merck", rated A2 stable).

"This transaction highlights Bayer's strong and consistent execution on its strategic objectives, that include a target of becoming the leading global player in the growing EUR 100 billion OTC (over the counter) consumer healthcare market. The deal will boost Bayer's positions in several key therapeutic categories globally and will broaden the company's distribution capabilities, particularly in the US, at the time of active consolidation in the OTC market. Bayer's winning bid also entails a wider strategic cooperation between the two companies in developing promising new cardiovascular medicines and will also allow Bayer to step up its presence in the US pharma market", said Elena Nadtotchi, Vice President Senior Credit Officer and Moody's lead analyst on the company. "Bayer will fund the USD 14.2 billion OTC acquisition by raising debt, including hybrid bonds. We expect that Bayer's financial profile will recover over the next 24 to 36 months, as the company's earnings and cash flow generation are set to strengthen significantly as a result of its prior investments".

On 6 May 2014, Bayer AG announced that it has reached an agreement with Merck to purchase its consumer care business for USD14.2 billion in cash. Merck's consumer care business reported approximately USD2.2 billion in revenues in 2013 (of which 70% were generated in the US) and comes with a strong portfolio of leading consumer care brands, which complements Bayer's geographic footprint and exposure to key therapeutic categories in the consumer care segment. The transaction is subject to the usual regulatory approvals, including by the antitrust authorities in the US. Bayer expects to close the transaction before the end of 2014.

Moody's understands that Bayer plans to fund the acquisition by placing senior and hybrid notes to refinance unsecured short-term bank loans put in place to fund the closing of the transaction.

RATINGS RATIONALE

Moody's decision to affirm Bayer's all A3/P-2 ratings reflects our positive assessment of the strategic rationale of the acquisition. Moody's expects the deal to strengthen Bayer's position in the profitable, stable and relatively capital un-intensive consumer care business and allow Bayer strengthen its global leading positions, in spite of recently announced consolidation of peers' consumer care businesses.

The affirmation of all A3/P-2 ratings is also underpinned by the expectation that Bayer will be able to reduce leverage in the next 24-36 months. As a result of the acquisition, Bayer will add debt and Moody's expects that its leverage will be close to 2.7x debt/EBITDA in 2014 (as adjusted by Moody's), compared to 1.6x at the end of 2013. Moody's expects that Bayer will deliver strong growth in earnings and operating cash flows in 2014-2016 on the back of strong performance of its new pharmaceutical products, as well as solid contribution by its Crop Science division and some improvement in the material science operations. Moody's expects this growth in earnings to drive leverage to below 2x in 2016. In the meantime, Bayer will continue to generate strong free cash flow and will retain flexibility to reduce debt.

Moody's notes the significant size of the acquisition and also acknoledges the company's track-record of successful integration and deleveraging, following several large acquisitions in the past. Moody's sees the expected use of hybrid bonds as an important credit supportive feature of the funding plan, characteristic of Bayer's conservative approach in managing its balance sheet and financial risks.

Bayer's A3/Prime-2 ratings are underpinned by the group's significant size and diversity of operations that spread across three main industries, with leading market positions in agriculture and materials, as well as strong organic growth momentum and leadership in health care.

Bayer's operating risk profile is increasingly determined by the developments in the health care businesses, as the company continues to strongly execute its organic growth agenda and integrates recent acquisitions in pharma and consumer health businesses. During current transitional period, Moody's will position the rating against a broad peer-group of selected pharmaceutical and chemical companies and may further adjust the financial guidance on Bayer's A3 rating to reflect the growing contribution of the healthcare business.

Rating outlook

The outlook on all the ratings has been changed to stable from positive. Following the OTC acquisition, Moody's expects Bayer to put in place a permanent capital structure that will include a meaningful hybrid component, and that the company will maintain the deleveraging course, such that its debt/EBITDA will decline sustainably below 2.5x in 2015 after the hybrid issuance and some deleveraging has taken place.

What could change the rating up/down

Moody's does not anticipate a negative pressure on the A3 ratings, given the fundamental strengthening of the business profile achieved by the company, that support the deleveraging assumptions. However, a delay in the expected recovery in the financial profile following the acquisition, with RCF/net debt sustained below mid-twenties level, could put a negative pressure on the A3 ratings.

An upgrade of the rating would require a resolute recovery in the credit profile, with Debt/EBITDA maintained sustainably below 2x and (RCF)/net debt maintained over 30%. An upgrade will also depend on Bayer's management strategy and financial policy, including its ability to maintain greater financial flexibility to support growth measures. Moody's will also look for an improving trend in returns in the Material Science division, to support the assumption of a stable business model.

Liquidity Profile

Bayer maintains a strong liquidity profile. It is supported by a substantial cash and short-term investments balance of c. EUR2.7 billion at the end of 1Q 2014 and the expectation of strong and improving operating cash flow generation over the next quarters.

The company maintains access to a EUR3.5 billion RCF which was fully undrawn at the end of Q1 2014 and does not contain any restrictive covenants. Moody's expect the facility to remain undrawn on closing of the acquisition.

In 1Q 2014, Bayer placed c. EUR 2.5 billion in senior notes to fund its EUR 1.9 billion acquisition of Algeta ASA in Norway and to help meet c. EUR 1.3 billion in bond maturity in September 2014.

The methodologies used in these ratings was the Global Chemical Industry Rating Methodology published in December 2013 and Global Pharmaceutical Industry published in December 2012. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.

Based in Leverkusen, Germany, Bayer AG is a diversified group with strong positions in HealthCare, CropScience, and high-quality polyurethanes and polycarbonates. In 2013, the group reported consolidated revenues of EUR40.2 billion and EBITDA before special items of EUR8.4 billion (EUR39.7 billion and EUR8.3 billion respectively for 2012).

Outlook Actions:

..Issuer: Bayer AG

....Outlook, Changed To Stable From Positive

..Issuer: Bayer Capital Corporation B.V.

....Outlook, Changed To Stable From Positive

..Issuer: Bayer Corporation

....Outlook, Changed To Stable From Positive

..Issuer: Bayer Holding Ltd.

....Outlook, Changed To Stable From Positive

..Issuer: Bayer Nordic SE

....Outlook, Changed To Stable From Positive

Affirmations:

..Issuer: Bayer AG

....Subordinate Regular Bond/Debenture Jul 29, 2105, Affirmed Baa3

....Senior Unsecured Commercial Paper, Affirmed P-2

....Senior Unsecured Medium-Term Note Program, Affirmed (P)A3

....Senior Unsecured Medium-Term Note Program, Affirmed (P)P-2

....Senior Unsecured Regular Bond/Debenture Jan 24, 2016, Affirmed A3

....Senior Unsecured Regular Bond/Debenture May 23, 2018, Affirmed A3

....Senior Unsecured Regular Bond/Debenture Jan 25, 2021, Affirmed A3

....Senior Unsecured Regular Bond/Debenture Jan 24, 2018, Affirmed A3

..Issuer: Bayer Capital Corporation B.V.

....Senior Unsecured Medium-Term Note Program, Affirmed (P)A3

....Senior Unsecured Medium-Term Note Program, Affirmed (P)P-2

....Senior Unsecured Regular Bond/Debenture Sep 26, 2014, Affirmed A3

..Issuer: Bayer Corporation

....Senior Unsecured Commercial Paper, Affirmed P-2

....Senior Unsecured Regular Bond/Debenture, Affirmed A3

....Senior Unsecured Regular Bond/Debenture, Affirmed P-2

....Senior Unsecured Regular Bond/Debenture Feb 15, 2028, Affirmed A3

....Senior Unsecured Regular Bond/Debenture Feb 15, 2028, Affirmed A3

....Senior Unsecured Regular Bond/Debenture Oct 1, 2015, Affirmed A3

..Issuer: Bayer Holding Ltd.

....Senior Unsecured Medium-Term Note Program, Affirmed (P)A3

....Senior Unsecured Medium-Term Note Program, Affirmed (P)P-2

....Senior Unsecured Regular Bond/Debenture Jun 8, 2017, Affirmed A3

....Senior Unsecured Regular Bond/Debenture Apr 5, 2017, Affirmed A3

....Senior Unsecured Regular Bond/Debenture May 15, 2019, Affirmed A3

....Senior Unsecured Regular Bond/Debenture Dec 19, 2018, Affirmed A3

..Issuer: Bayer Nordic SE

....Multiple Seniority Medium-Term Note Program, Affirmed (P)A3

....Multiple Seniority Medium-Term Note Program, Affirmed (P)P-2

....Senior Unsecured Regular Bond/Debenture Apr 4, 2016, Affirmed A3

....Senior Unsecured Regular Bond/Debenture Mar 28, 2017, Affirmed A3

..Issuer: Gulf Coast Waste Disposal Authority, TX

....Senior Unsecured Revenue Bonds May 1, 2027, Affirmed A3

....Senior Unsecured Revenue Bonds May 1, 2027, Affirmed P-2

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this rating action, and whose ratings may change as a result of this rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Elena Nadtotchi
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

David Staples
MD - Corporate Finance
Corporate Finance Group
Telephone: 00971 4237 9536

Releasing Office:
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moody's affirms Bayer's A3 ratings; changes outlook to stable from positive
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