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Rating Action:

Moody's upgrades CVS Caremark's senior unsecured rating to Baa1

Global Credit Research - 23 Sep 2013

Approximately $9.5 billion of Rated Debt Securities Affected

New York, September 23, 2013 -- Moody's Investors Service today upgraded CVS Caremark Corporation's senior unsecured rating to Baa1 from Baa2. At the same time CVS Caremark's Commercial Paper rating was affirmed at Prime-2. The rating outlook is stable. The upgrade acknowledges Moody's belief that CVS Caremark's solid growth in operating income and recent improvement in operating margin is sustainable and that the trend will continue.

"CVS Caremark's earnings will continue to benefit from numerous positive industry trends including; the solid growth in specialty pharmacy, increasing generic utilization rates, further branded drugs coming off patent, and the high growth in the US population over the age of 65," stated Maggie Taylor a Senior Credit Officer at Moody's.

Furthermore, Moody's believes that CVS Caremark's cost streamlining initiative at its pharmacy services division is achievable and will contribute to its operating margin improvement. Lastly, while currently a small component, Minute Clinic presents CVS Caremark with a high growth opportunity over the longer term. Moody's believes that these positive trends will more than offset the pressure on reimbursement rates, the modest attrition in its SilverScript business as a result of the CMS sanctions, and the reversal of any sales it gained as a result of Walgreen's dispute with Express Scripts in 2012. Thus, Moody's believe that CVS Caremark's reversal during 2013 of its four year decline in operating margins is sustainable and operating margins will modestly improve going forward.

The following ratings are upgraded:

Senior unsecured notes to Baa1 from Baa2

Senior unsecured mtn program to (P) Baa1 from (P) Baa2

Jr. subordinated notes to Baa2 from Baa3

The following rating is affirmed:

Commercial Paper rating at Prime-2

RATINGS RATIONALE

A key underpinning of CVS Caremark's Baa1 senior unsecured rating is its strong market position in two industry sectors with solid fundamentals given their focus on providing prescription drugs. CVS Caremark is a solid number two player in both its retail pharmacy division and its pharmacy services division. Both the retail pharmacies and the pharmacy services division will benefit from broad demographic trends which will continue to drive increasing usage of prescription medication. In addition, the rating balances the strength of the retail pharmacy division with the high price competition and contract renewal risk associated with its pharmacy benefit management company (PBM).

The rating also reflects CVS Caremark's clearly stated financial policy including its targeted 2.7 times lease adjusted debt to a rent adjusted EBITDA, 25 to 30% dividend payout ratio, and good liquidity. However, CVS Caremark has a history of making debt financed acquisitions and the rating factors in the risk that this practice will continue.

The stable outlook acknowledges Moody's expectation that there will no change to CVS Caremark's clearly stated financial policy. In addition, it also acknowledges that Moody's expects CVS Caremark's operating earnings to grow. However, credit metrics will remain fairly in line with the Baa1 rating given CVS Caremark's 2.7 times lease adjusted debt to EBITDAR leverage target.

Ratings could be upgraded should CVS Caremark's operating results continue on their current trend and CVS Caremark would to revise its financial policy such that its leverage target would be at or below 2.5 times, while maintaining retained cash flow to net debt above 25% and EBITA to interest expense above 6.0 times.

Given the recent upgrade, it is unlikely at the present time that ratings would be downgraded. Prospectively, ratings could be downgraded should operating performance decline or financial policy become more aggressive such that debt to EBITDA were to remain above 3.25 times or EBITA to interest expense were to fall below 5.0 times.

The principal methodology used in this rating was the Global Retail Industry Methodology published in June 2011.Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

CVS Caremark Corporation, headquartered in Woonsocket, Rhode Island, fills the largest number of prescriptions in the United States. The company fills or manages more than 1 billion prescriptions annually. It operates over 7,500 retail pharmacy stores in 42 states, the District of Columbia, Puerto Rico, and Brazil. In addition, it has a pharmacy benefits management operation, a mail order and specialty pharmacy division, an on-line pharmacy, and over 650 MinuteClinics in twenty five states and the District of Columbia. It is the only fully integrated pharmacy health care company in the United States. Revenues are over $123 billion.

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.

Margaret Taylor
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Janice Ann Hofferber
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's upgrades CVS Caremark's senior unsecured rating to Baa1
No Related Data.

 

© 2014 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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