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Rating Action:

Moody's changes Bayer's outlook to negative on litigation risks, affirms Baa2

08 Dec 2021

Frankfurt am Main, December 08, 2021 -- Moody's Investors Service ("Moody's") today affirmed the Baa2 senior unsecured ratings of Bayer AG (Bayer), the company's (P)Baa2 senior unsecured MTN programme rating and the Ba1 ratings of its hybrid notes. Concurrently, Bayer's short-term commercial paper rating was affirmed at P-2. The outlook on the ratings has been changed to negative from stable.

A full list of affected ratings can be found at the end of this press release.

RATINGS RATIONALE

The change in outlook of Bayer to negative from stable reflects the risk of higher financial payouts associated with ongoing litigation. These risks largely relate to legacy risks of Monsanto Inc. that Bayer acquired in 2018; more specifically: Roundup (glyphosate), PCB and Dicamba, in addition to shareholder lawsuits against Bayer in the US and Germany in conjunction with the Monsanto acquisition. The ongoing litigation is negative from a number of perspectives: it (i) has been costly and reduces Bayer's flexibility to replenish its pharma pipeline; (ii) leaves a high degree of uncertainty around future outcomes (including financial payouts) given the lengthy legal proceedings; and (iii) has damaged the reputation of the company and its brands.

As of 22 October 2021, about 98,000 of approximately 125,000 glyphosate claims (as reported in the annual report 2020) have been resolved or deemed to be ineligible and the company is guiding for around €5.5 billion in settlement payouts in 2021. Bayer has earmarked a settlement amount of up to $9.6 billion (€8.5 billion) as reported in the annual report 2020 to cover these approximately 125,000 current cases. In addition, the company has set aside a total of $6.5 billion (as published end of July 2021; gross of tax and before discounting; around €5.8 billion) to settle any future potential claims.

The US Supreme Court could decide as early as 10 December 2021, whether or not to hear Bayer's case. Even if the court accepts to hear the case, it remains uncertain whether the court will issue a favourable verdict once it closes the case, which is expected to be in mid-2022. The negative outlook also reflects this period of continued uncertainty. Moody's could move the outlook back to stable in case of a favourable opinion of the US Supreme Court and a concurrent strengthening of Bayer's operating performance.

It is Moody's understanding that in the case of a favourable Supreme Court ruling, Bayer could substantially de-risk further glyphosate-related settlements. However, a scenario of an adverse ruling by the US Supreme Court could expose Bayer to further legal proceedings in the US, that in turn could result in additional material financial payouts in excess of what the company has to date provided for. Plaintiffs who opt out of the initial settlement can pursue claims against Bayer. In such a scenario Bayer's credit metrics would unlikely be aligned with the current Baa2 rating. This risk is now reflected in the negative outlook. Bayer has so far paid $20.5 million for the Johnson case. In November a court ruled that Bayer must pay $86.2 million in the Pilliod case, which Bayer, however, can still appeal.In October 2021 Bayer won its first trial (Clark trial) over claims that Roundup causes cancer.

Bayer this year presented a five-point plan that aims at mitigating glyphosate-related risks. It includes the reformulation of some Roundup consumer products as the overwhelming majority of claimants in the litigation allege that they used Roundup, ongoing efforts to settle existing claims and appeals of the Hardeman and Pilliod cases.

Despite Bayer's claims -- based on scientific evidence presented -- that glyphosate does not cause cancer, the damage to the Bayer, Monsanto and Roundup brands and the reputation of Bayer have suffered from the global media coverage, the public debate and the controversy around product safety. With the pending Supreme Court decision and the EU's decision in 2022 whether to continue to license glyphosate, the public debate is unlikely to abate. Bayer does not publish the revenue contribution from glyphosate or information on the glyphosate sales split between professional and private consumers. However, the company has made public comments that the majority of its glyphosate-related sales are to professional users, so that any revenue and profitability loss from sales to private consumers is likely to be limited. Professional users, such as farmers, remain the largest pool of consumers and have -- absent a herbicide as effective as glyphosate -- been supportive of the product, using it to increase their yield.

Other legal proceedings against Bayer include PCB, Dicamba and shareholder litigation. Whilst Moody's expects any potential financial payouts related to these litigations to be much smaller when compared to glyphosate-related settlements, they are nevertheless a distraction and damage the reputation of the company and its brands due to the negative publicity. In two separate cases, that are related to the same PCB-contaminated building, juries in the US have awarded $185 million and $62 million respectively. In total there are around 200 plaintiffs in connection with this particular building. Bayer in 2020 settled other PCB-related cases for $650 million with various government authorities in the US. Bayer reached an agreement in 2020 to settle for up to $400 million Dicamba-related cases for which lawsuits from approximately 230 plaintiffs had been served upon Bayer's subsidiary Monsanto and co-defendant BASF (SE) (A3 stable) in both state and federal courts in the United States. Litigation by shareholders regarding the takeover of Monsanto is ongoing in the US and Germany. The company has not set aside any provisions for these cases.

The affirmation of ratings reflects operating performance improvements. Group sales for the first nine months of 2021 grew by 5% (9% currency and portfolio adjusted) supported by growth in all three segments. Reported EBITDA in the same period was 3% lower as it was affected by a negative currency impact of around €0.5 billion, higher marketing costs associated with the launch of two pharmaceutical products and higher R&D expenses. Absent higher than already provisioned payouts for legal settlements, Moody's expects Bayer's credit metrics to improve in 2022 against 2021: EBITDA of around €9.9 billion in 2021 (around €11.0 billion in 2022), a Moody's-adjusted margin of 23.0% (25%) and debt/EBITDA of around 4.7x (3.6x).

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

Moody's could downgrade ratings if financial payouts from ongoing litigation would be materially higher than what Bayer has currently provided for and, as a result of higher payouts, if debt/EBITDA were to remain above 4.0x and RCF/net debt below 15%.

The ratings could be upgraded if Moody's-adjusted debt/EBITDA falls below 3.0x and RCF/net debt rises sustainably above 20%. For ratings to be upgraded Moody's would also expect a meaningful de-risking of legal risks, foremost with regards to ongoing glyphosate litigation.

LIST OF AFFECTED RATINGS:

..Issuer: Bayer AG

Affirmations:

....Preference Stock, Affirmed Ba1

....Commercial Paper, Affirmed P-2

....Senior Unsecured Medium-Term Note Program, Affirmed (P)Baa2

....Senior Unsecured Regular Bond/Debenture, Affirmed Baa2

Outlook Actions:

....Outlook, Changed To Negative From Stable

..Issuer: Bayer Capital Corporation B.V.

Affirmations:

....BACKED Senior Unsecured Medium-Term Note Program, Affirmed (P)Baa2

....BACKED Senior Unsecured Regular Bond/Debenture, Affirmed Baa2

Outlook Actions:

....Outlook, Changed To Negative From Stable

..Issuer: Bayer Corporation

Affirmations:

....BACKED Commercial Paper, Affirmed P-2

....BACKED Senior Unsecured Regular Bond/Debenture, Affirmed Baa2

Outlook Actions:

....Outlook, Changed To Negative From Stable

..Issuer: Bayer Holding Ltd.

Affirmations:

....BACKED Senior Unsecured Medium-Term Note Program, Affirmed (P)Baa2

....BACKED Senior Unsecured Regular Bond/Debenture, Affirmed Baa2

Outlook Actions:

....Outlook, Changed To Negative From Stable

..Issuer: Bayer Nordic SE

Affirmations:

....BACKED Senior Unsecured Medium-Term Note Program, Affirmed (P)Baa2

Outlook Actions:

....Outlook, Changed To Negative From Stable

..Issuer: Bayer US Finance II LLC

Affirmations:

....BACKED Senior Unsecured Regular Bond/Debenture, Affirmed Baa2

Outlook Actions:

....Outlook, Changed To Negative From Stable

..Issuer: Bayer US Finance LLC

Affirmations:

....BACKED Senior Unsecured Regular Bond/Debenture, Affirmed Baa2

Outlook Actions:

....Outlook, Changed To Negative From Stable

PRINCIPAL METHODOLOGY

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.

COMPANY PROFILE

Based in Leverkusen, Germany, Bayer AG (Bayer) is a diversified group, with strong positions in crop protection, seeds and traits, pharmaceuticals and consumer care. Excluding discontinued operations, Bayer generated consolidated revenue of €41.4 billion and EBITDA before special items of €11.5 billion in 2020, equivalent to a margin of 27.7%. Bayer had a market capitalisation of around €45 billion as of 7 December 2021.

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 http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1288235.

At least one ESG consideration was material to the credit rating action(s) announced and described above.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

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.

Martin Kohlhase
VP - Senior Credit Officer
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.
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