OREANDA-NEWS. Fitch Ratings has assigned a 'BBB+' rating to Baxter International Inc.'s (Baxter) senior unsecured notes offering. Fitch expects the net proceeds from the issuance to be used to pay down existing debt and short-term borrowings, as well as other general corporate purposes.

Baxter had approximately $3.2 billion in outstanding debt at June 30, 2016. A full list of Baxter's ratings follows at the end of this release. The Rating Outlook is Stable.

KEY RATING DRIVERS

--The 'BBB+' rating reflects Baxter's significant deleveraging and strong operating performance post the spin-off of the company's biosciences business in June 2015.

--Baxter's operating profile benefits from good organic growth prospects in its primary business lines.

--Fitch expects the company will continue to generate solid free cash flow (FCF) and deploy capital consistent with its current rating.

--Baxter will likely remain acquisitive, but Fitch believes the company will focus on targeted acquisitions that deepen its existing product portfolio or add adjacencies.

Meaningful Deleveraging Post Spin: Baxter has reduced leverage to below 2.0x within 12 months of the Baxalta spinoff on July 1, 2015. Immediately after the spinoff, Fitch estimated pro forma leverage (unadjusted gross debt to forecasted standalone EBITDA) was roughly 6x with total debt of roughly $9.2 billion. During the next 12 months, the company reduced debt by roughly $6 billion, funded by the $4 billion cash distribution received from Baxalta and the disposition of its roughly 19.5% equity stake in Baxalta. On May 6, 2016, the company contributed roughly 17 million Baxalta shares to its U. S. qualified pension plan, reducing the unfunded liability of the benefit obligation.

Continued Operational Strength: Fitch expects Baxter to generate 3%-4% organic growth in nearly all of its business segments through the intermediate term, although near-term reported growth will likely face some foreign exchange headwinds. Demand for the company's products is relatively reliable, although revenues are modestly sensitive to the macroeconomic environment through reimbursement rates (pricing) and, to a lesser extent, utilization. Fitch expects that the commercializing of pipeline products will also provide support for longer-term top-line growth and incrementally increasing margins.

Business Model Still Diversified: The company's business model remains fairly diversified from both a product and geographic perspective, despite the bioscience spinoff. Baxter has four major product-focused franchises: Renal (accounting for 38% of total firm sales), Fluid Systems (23%), Integrated Pharmacy Solutions (23%) and Surgical Care (13%). The company has global reach, manufacturing products in approximately 25 countries and selling them in approximately 120 countries. U. S. sales account for roughly 42% of total firm sales.

Strong Cash Flow Expected: Fitch expects that Baxter will generate roughly $1.5 billion to $1.6 billion in annual pro forma cash flow from operations during 2016 driven by expected operational strength and sound working capital management. Operational cash flow should be sufficient to fund approximately $900 million to $1 billion of capital expenditures and approximately $250 million to $270 million in dividends.

Acquisitive Posture to Persist: Fitch expects targeted acquisitions will remain a core element of Baxter's long-term growth strategy, using cash balances and incremental debt to fund future transactions. Fitch believes the company will focus on platforms that provide enhancements or adjacencies to its existing portfolio. Fitch expects that typical leverage of 1.7x-2.1x for Baxter could increase to around 2.5x from acquisitions or significant manufacturing capacity expansions, with FCF providing a source of timely deleveraging.

KEY ASSUMPTIONS

Fitch's key assumptions within the rating case for Baxter include:

--Low-single-digit reported revenue growth with organic growth in all business segments.

--Gradually improving operating EBITDA margin, particularly as Baxter drives a mix shift to higher margin products and improves operational efficiency.

--Cash dividends gradually and consistently increasing over time.

--FCF (cash flow from operations minus capital expenditures minus dividends) of $200 million to $300 million through 2016 and meaningfully increasing thereafter.

--Targeted acquisitions with no strategic, transformative transactions.

--Leverage to range between 1.8x-2.1x.

RATING SENSITIVITIES

Positive: While Fitch does not anticipate an upgrade in the near to intermediate term, a positive rating action could result from Baxter committing to and operating with leverage consistently and significantly stronger than 1.7x, while maintaining stable operations sustained with positive organic growth and solid FCF.

Negative: Future developments that may, individually or collectively, lead to a Negative Outlook or one notch downgrade to 'BBB' include:

--Debt above 2.5x EBITDA without the prospect for timely deleveraging.

--Potential increased leverage resulting from operational stress or share repurchases would need to be reduced more quickly than leverage from an acquisition.

LIQUIDITY

Adequate Liquidity: Fitch expects Baxter to maintain adequate liquidity, supported by its credit facilities, positive FCF and balance sheet cash. FCF was a negative $14 million during the latest 12 months (LTM) period ended June 30, 2016, due to significant non-recurring cash charges. At June 30, 2016, cash on hand was roughly $2.6 billion, and Baxter had full availability on its credit facilities, amounting to USD1.5 billion and EUR150 million, both of which mature in July 2020.

Manageable Debt Maturities: Total debt was roughly $3.2 billion at June 30, 2016, and resulting/estimated leverage was 1.93x. Fitch believes Baxter's debt maturities are manageable, with roughly $132 million of long-term debt maturing in 2016 (excluding $791 million of commercial paper borrowings), $144 million in 2017, $540 million in 2018 and $138 million in 2019. Fitch expects some of these maturities to be tendered and funded with the proceeds from today's announced issuance.

FULL LIST OF RATINGS

Fitch currently rates Baxter as follows:

Baxter International Inc.

--Long-Term IDR 'BBB+';

--Unsecured bank facility 'BBB+';

--Unsecured notes 'BBB+';

--Short-Term IDR 'F2';

--Commercial paper 'F2'.

The Rating Outlook is Stable.