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Rating Action:

Moody's affirms Bayer's Baa1 rating revises outlook to negative

05 Oct 2020

Frankfurt am Main, October 05, 2020 -- Moody's Investors Service, ("Moody's") today affirmed Bayer AG's (Bayer) senior unsecured rating at Baa1, concurrently the rating agency has affirmed the company's senior unsecured MTN program rating at (P)Baa1, the ratings of its hybrid notes at Baa3 and Bayer's short-term commercial paper rating at P-2. The outlook on the ratings has been changed to negative from stable.

Outlook Actions:

..Issuer: Bayer AG

....Outlook, Changed To Negative From Stable

..Issuer: Bayer Capital Corporation B.V.

....Outlook, Changed To Negative From Stable

..Issuer: Bayer Corporation

....Outlook, Changed To Negative From Stable

..Issuer: Bayer Holding Ltd.

....Outlook, Changed To Negative From Stable

..Issuer: Bayer Nordic SE

....Outlook, Changed To Negative From Stable

..Issuer: Bayer US Finance II LLC

....Outlook, Changed To Negative From Stable

..Issuer: Bayer US Finance LLC

....Outlook, Changed To Negative From Stable

Affirmations:

..Issuer: Bayer AG

....Preference Stock, Affirmed Baa3

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

....Senior Unsecured Medium-Term Note Program, Affirmed (P)Baa1

....Senior Unsecured Regular Bond/Debenture, Affirmed Baa1

..Issuer: Bayer Capital Corporation B.V.

....Backed Senior Unsecured Medium-Term Note Program, Affirmed (P)Baa1

....Backed Senior Unsecured Regular Bond/Debenture, Affirmed Baa1

..Issuer: Bayer Corporation

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

....Backed Senior Unsecured Regular Bond/Debenture, Affirmed Baa1

..Issuer: Bayer Holding Ltd.

....Backed Senior Unsecured Medium-Term Note Program, Affirmed (P)Baa1

....Backed Senior Unsecured Regular Bond/Debenture, Affirmed Baa1

..Issuer: Bayer Nordic SE

....Backed Senior Unsecured Medium-Term Note Program, Affirmed (P)Baa1

..Issuer: Bayer US Finance II LLC

....Backed Senior Unsecured Regular Bond/Debenture, Affirmed Baa1

..Issuer: Bayer US Finance LLC

....Backed Senior Unsecured Regular Bond/Debenture, Affirmed Baa1

RATINGS RATIONALE

Today's rating action follows Bayer's announcement[1] that it expects 2021 group revenues to be flat compared to 2020 and core earnings per share to be slightly below 2020 levels, both based on constant exchange rates, citing reduced growth prospects for its Crop Science business due to lower commodity prices, fierce competition in its soybean business and currency headwinds. In response to those challenges the company has announced additional cost savings measures of more than €1.5 billion to be implemented by 2024. Furthermore the company has guided that dividends will for the years to come be at the lower end of the target range of its dividend policy, which targets a dividend payout of 30%-40% of core earnings per share, we would expect a dividend per share of €2 to result in cash savings of around €800 million per year. In addition, the company expects to record a non-cash asset impairment in its Crop Science division in the mid to high single digit billion € range due to reduced growth prospects. Bayer also announced that it is contemplating additional disposals below divisional level.

Lower growth prospects of Bayer's Crop Science business, in combination with additional restructuring cash outflows will delay the company's deleveraging trajectory further. In the context of continued uncertainty of the company's ability to settle future and current round up claims for the amounts announced in June 2020, this slower than initially expected deleveraging continues to position Bayer weakly in the Baa1 rating category. Moody's now expects Bayer's Moody's-adjusted debt/EBITDA in 2021 to be at around 3.8x with further deleveraging towards 3.5x in 2022. This compares to June 2020 expectations of leverage in 2021 to be below 3.5x followed by further deleveraging towards 3.0x in 2022. Moody's positively takes into account that lower dividend payments will partially offset lower operational cash flows including restructuring expenses. The additional cost savings of €1.5 billion should support additional deleveraging, however, timing and implementation cost of these savings at this stage remain uncertain. Moody's notes, that the rating is now very weakly positioned, and any deviation from the expected performance or substantial additional extraordinary payments will increase negative pressure.

The Baa1 continues to reflect the risks associated with the realization of cost savings and upcoming patent expiries of Bayer's best selling drugs Xarelto and Eylea, with the majority of the negative effects from these patent expiries to be felt from 2024 onwards. Expected revenue losses can only be partially offset by the company's pharmaceutical pipeline, replenishing its pharma pipeline will require substantial financial resources. In Moody's view Bayer has no headroom under its Baa1 rating to pursue sizeable debt funded acquisitions. The rating furthermore reflects the continued uncertainty with regards to Bayer's ability to settle current and future Round Up litigations for the amounts announced in June 2020.

LIQUIDITY

Bayer maintains an adequate liquidity. As of the end of June 2020, Bayer held cash balances of €3.1 billion and short-term investments of around €1.9 billion, including €395 million worth of shares in Covestro AG (Baa2 negative) that were held in relation to the exchangeable bond which matured in June 2020. In July the company issued bonds with a total volume of €6 billion and has closed the sale of Elanco, which results in net cash inflow of around €4.1 billion. In addition, the company has received 72.9 million shares in Elanco, currently valued at around €1.7 billion. Meanwhile, the company has access to a €4.5 billion revolving credit facility, which does not contain any restrictive covenants. This facility is currently undrawn and matures in 2024 with a one-year extension option. In combination with expected free cash flow generation these sources comfortably cover expected litigation cash out flows and upcoming debt maturities of around €8 billion in 2021.

RATING OUTLOOK

The negative outlook is due to the weak positioning of Bayer in this rating category as reflected by the risk that Bayer's deleveraging trajectory over the next 12-18 month will not be commensurate with the assigned Baa1 rating. Risk factors considered in the outlook include slower than expected growth of the company's Crop Science business, risks related to the implementation of cost saving programs and uncertainty with regards to the company's ability to settle current and future Round Up litigations for the amounts announced in June 2020.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

Although unlikely at this stage, Bayer's ratings could be upgraded following the successful integration of Monsanto and some significant balance-sheet deleveraging, which would allow adjusted total debt/EBITDA and RCF/net debt to be positioned below 2.5x and above 25%, respectively, on a sustained basis.

Downward pressure on Bayer's ratings may occur should Bayer's performance weaken further or if there is additional substantial amounts of extraordinary payments or settlements and fail to generate sufficient free cash flow to reposition its Moody's-adjusted financial metrics in line with the ratings with total debt/EBITDA trending down towards 3.0x and RCF/net debt rising close to 20%. Negative rating pressure exacerbate if there will be evidence that announced settlement agreements do not provide reasonable closure to the litigations or in case of increasing litigation pay outs. Over time, downward pressure on the ratings could also develop should Bayer suffer material setbacks in the execution of its pharmaceutical pipeline or engaged in debt-funded acquisitions to replenish it.

The principal methodology used in these ratings was Chemical Industry published in March 2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1152388. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security 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 credit rating action on the support provider and in relation to each particular credit 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 credit rating action, and whose ratings may change as a result of this credit 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.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

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

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.

REFERENCES/CITATIONS

1 https://www.investor.bayer.com/en/nc/news/investor-news/investor-news/bayer-to-accelerate-transformation-to-address-challenging-market-environment-and-enable-additional-g/

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.

Moritz Melsbach
Asst Vice President - Analyst
Corporate Finance Group
Moody's Deutschland GmbH
An der Welle 5
Frankfurt am Main 60322
Germany
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Matthias Hellstern
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Releasing Office:
Moody's Deutschland GmbH
An der Welle 5
Frankfurt am Main 60322
Germany
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

No Related Data.
© 2021 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.

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