OREANDA-NEWS. Fitch Ratings has downgraded and withdrawn the ratings of Baxalta Incorporated (Baxalta; NYSE: BXLT), including the Long-Term Issuer Default Rating (IDR) to 'BBB' from 'BBB+' with a Negative Rating Outlook. The rating action follows the completion of Baxalta's acquisition by Shire PLC (Shire; NASDAQ: SHPG) for roughly $32 billion, including $12 billion in cash and $20 billion in Shire stock.

A full list of rating actions, which apply to approximately $5.3 billion of debt as of March 31, 2016, follows at the end of this release.

Fitch has chosen to withdraw the Baxalta's ratings due to insufficient information.

KEY RATING DRIVERS

Transaction Significantly Increases Leverage: The cash component of the purchase price will initially be financed with a new one-year $18 billion bank facility that Shire plans to refinance fairly quickly. Fitch estimates that initial pro forma gross leverage could exceed 6.0x (not including synergies or any contribution from recent acquisitions). This is significantly higher debt leverage than both Baxalta's pro forma stand-alone levels of roughly 3.0x for full-year 2015 and the longer-term run rate of roughly 2.25x, which Fitch views as supportive of 'BBB+' ratings for a firm with Baxalta's business profile.

When the deal was announced in January 2016 Shire expected that net leverage following the deal's completion would be less than 5.0x and said that it planned to reduce this ratio to between 2.0x-3.0x by year-end 2017, through debt reduction and earnings growth. Assuming no additional debt funded transactions, this projection appears attainable if Shire successfully executes its integration of Baxalta and generates expected synergies and strategic benefits of the business combination. Fitch nevertheless believes that even if net leverage is reduced to 3.0x 12-18 months after the deal closes, this level is outside the range commensurate with a 'BBB+' rating.

The Negative Outlook reflects the current lack of clarity regarding Shire's debt repayment plans as well as integration risk inherent in any large acquisition. Fitch further recognizes that additional near to medium term acquisition activity, which Shire management has not ruled out, could delay Shire's de-levering plans.

Shire Historically More Aggressive than Baxalta: Shire has historically exhibited a more aggressive approach to business development than Baxalta demonstrated prior to its spin-off from Baxter International Inc. on July 1, 2015. Baxalta's historically conservative approach to capital management and business development was a key consideration when Fitch assigned first-time ratings to the company in May 2015.

Shire has now completed or announced eight acquisitions since calendar year 2013, including its January 2016 purchase of Dyax Corp (DYAX: SHPG) in a debt-funded transaction for approximately $5.9 billion in cash and a $396 million contingent value right. While Shire has not experienced any notable problems integrating its acquisitions to date, Fitch views the company's willingness to employ significant leverage to pursue targets of meaningful size as indicative of a likely shift in strategy from the more conservative approach that Fitch expected of Baxalta.

Transaction Boosts Competitive Position: The combination with Shire will meaningfully strengthen Baxalta's scale and the diversification of products both in the market and under development. The combined identity would be the global leader in rare diseases, and the depth and breadth of each company's product offerings will be significantly enhanced. Joining with Shire will also more than double Baxalta's annual revenues, which totaled roughly $6.1 billion in 2015.

Prior to the announcement, Baxalta was expecting approximately 20 new product launches generating more than $2.5 billion in sales by 2020. Combined with Shire's drug development pipeline, this number improves to more than 30 new launches with $5 billion in planned sales by 2020. There is no notable overlap in the therapeutic areas that each company addresses, so the combination significantly reduces Baxalta's reliance on its three key therapeutic areas of hematology, immunology, and oncology which previously accounted for about 90% of total revenues.

RATING SENSITIVITIES

Rating sensitivities are no longer relevant given today's rating withdrawal.

LIQUIDITY

Fitch expects the combined Shire/Baxalta entity to maintain a solid liquidity profile through strong FCF generation and ample access to the credit markets. Shire/Baxalta had total cash on hand of approximately $980 million at March 31, 2016, all of which is considered unrestricted by Fitch due to Shire's domicile in Jersey (Channel Islands).

Additional sources of liquidity available to the combined entity include Shire's $2.1 billion revolving credit facility which terminates in 2020. As of March 31, 2016 Shire had utilized $1.2 billion of this facility.

Baxalta's total debt as of March 31, 2016 was $5.6 billion and primarily consisted of:

--$300 million of outstanding Commercial Paper;

--$375 million of variable rate senior unsecured notes due June 2018;

--$375 million of 2.00% senior unsecured notes due June 2018;

--$1,000 million of 2.875% senior unsecured notes due June 2020;

--$500 million of 3.600% senior unsecured notes due June 2022;

--$1,750 million of 4.00% senior unsecured notes due June 2025;

--$1,000 million of 5.25% senior unsecured notes due June 2045.

FULL LIST OF RATING ACTIONS

The following ratings have been downgraded and withdrawn with a Negative Rating Outlook:

Baxalta Incorporated

--IDR to 'BBB' from 'BBB+';

--Senior unsecured debt to 'BBB' from 'BBB+'.

The following ratings have been affirmed and withdrawn:

Baxalta Incorporated

--Short-term IDR at 'F2';

--Commercial paper program at 'F2'.