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23 Feb 2011
Outlook remains stable
New York, February 23, 2011 -- Moody's Investors Service assigned a Baa2 to McKesson Corporation's
(McKesson) new senior unsecured note offering. Proceeds will be
used to refinance debt assumed in conjunction with the December 2010 acquisition
of US Oncology Holdings, Inc. At the same time, Moody's
affirmed McKesson's existing ratings (Baa2/Prime-2) and stable
outlook. In addition, Moody's is withdrawing the ratings
of both US Oncology Holdings, Inc. and US Oncology,
Inc., concluding our rating review, which was initiated
when the acquisition was announced.
"While this incremental debt does reduce McKesson's financial
flexibility, it is consistent with our expectations at the time
the US Oncology acquisition was announced,'' said Diana
Lee, a Moody's Senior Credit Officer.
US Oncology is among the largest acquisitions that McKesson has made in
the recent past and came on the heels of an accelerated buyback initiative.
We believe US Oncology will offer McKesson greater opportunities to partner
with community-based oncologists and augment its existing specialty
distribution business. However, prior to being acquired,
US Oncology's EBITDA levels and margins had been under pressure
as tougher ESA (erythropoietin-stimulating agent) prescribing guidelines
for treating anemia in cancer patients affect profitability. We
believe that the impact of further requirements or guidelines, including
the potential for CMS to issue a national coverage decision on the use
of ESAs (specifically Aranesp) is unknown at this time.
McKesson's Baa2 rating reflects its position as one of the nation's leading
drug distributors, but also considers extremely thin operating margins
that remain subject to pressure from customers. Compared to its
peers, however, McKesson does benefit from its higher margin
technology solutions business, which accounts for about 15-20%
of operating profits.
The stable outlook reflects Moody's expectation that McKesson will sustain,
at a minimum, financial strength ratios consistent with its Baa2
rating (including FCF/Debt of 20% and RCF/Debt in the 40%-45%
range). It further assumes that the company is likely to maintain
leverage below the upper end of its 30-40% target reported
If future debt-financed acquisitions or buybacks raise leverage
above the company's targeted debt/capitalization ratio, or margins
show material deterioration, the ratings or outlook could come under
In light of the incremental debt assumed from the acquisition of US Oncology,
an upgrade is unlikely over the foreseeable future. Over time,
if the company can achieve ongoing margin improvement and greater balance
across its various distribution and IT segments, and can demonstrate
a return to more conservative financial policies, the ratings could
face upward pressure.
Baa2 new senior unsecured notes
Baa2 Senior unsecured notes
Prime-2 Short-term rating
Baa2 Backed Industrial Revenue Bonds
(P)Baa2 Senior unsecured shelf
(P)Baa3 Subordinated shelf
(P)Baa3 Senior subordinated shelf
(P)Baa3 Junior subordinated shelf
(P)Ba1 Preferred shelf
McKesson Canada Corporation
Prime-2 Short-term rating
US Oncology Holdings, Inc.
Caa1 (LGD6, 90%) senior unsecured notes
US Oncology, Inc.
Ba3 (LGD2, 27%) senior secured 2nd lien notes
B3 (LGD5,74%) senior subordinated notes
For additional information, please see Moody's Credit Opinion on
McKesson at www.moodys.com.
The last rating action for McKesson was taken on June 21, 2010 when
Moody's raised the company's long- term and short-term
ratings to Baa2 and Prime-2, respectively.
McKesson's ratings were assigned by evaluating factors we believe are
relevant to the credit profile of the issuer, such as: i)
the business risk and competitive position of the company versus others
within its industry, ii) the capital structure and financial risk
of the company, iii) the projected performance of the company over
the near to intermediate term, and iv) management's track record
and tolerance for risk. These attributes were compared against
other issuers both within and outside of McKesson's core industry and
McKesson's ratings are believed to be comparable to those of other issuers
of similar credit risk.
McKesson Corporation, located in San Francisco, California,
is a leading pharmaceutical drug distributor. Its information systems
business provides software and hardware support to a large portion of
the nation's hospitals. The company reported revenues of nearly
$110 billion for the twelve months ended December 31, 2010.
Information sources used to prepare the credit rating are the following:
parties involved in the ratings, parties not involved in the ratings,
public information, confidential and proprietary Moody's Investors
Service information, and confidential and proprietary Moody's
Moody's Investors Service considers the quality of information available
on the issuer or obligation satisfactory for the purposes of assigning
a credit rating.
Moody's adopts all necessary measures so that the information it uses
in assigning a credit rating is of sufficient quality and from sources
Moody's considers to be reliable including, when appropriate,
independent third-party sources. However, Moody's
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Please see ratings tab on the issuer/entity page on Moodys.com
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a time before Moody's Investors Service's Credit Ratings were fully digitized
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Please see the ratings disclosure page on our website www.moodys.com
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Please see the Credit Policy page on Moodys.com for the methodologies
used in determining ratings, further information on the meaning
of each rating category and the definition of default and recovery.
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service
MD - Corporate Finance
Corporate Finance Group
Moody's Investors Service
Moody's Investors Service
Moody's rates McKesson's new notes Baa2; affirms existing ratings
250 Greenwich Street
New York, NY 10007
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