OREANDA-NEWS. Fitch Ratings has affirmed the ratings for AmerisourceBergen Corp. (NYSE: ABC), including the Long-term Issuer Default Rating (IDR) at 'A-'. The ratings have been removed form Negative Watch. The Rating Outlook is Negative.

The ratings apply to approximately \$2 billion of debt outstanding at Dec. 31, 2014. Fitch has also assigned an 'A-' rating to ABC's \$1.15 billion of new bonds and \$1 billion term loan facility due 2020.

A full list of rating actions follows at the end of this release.

KEY RATING DRIVERS

U.S. drug distributors maintain stable operating profiles due to the industry's oligopolistic nature and steady pharmaceutical demand. Drug distribution, though low margin, is relatively insulated from pricing and regulatory pressures faced by other areas of healthcare in the U.S.

Fitch views favorably ABC's recent strategic transactions, including its alignment with Walgreens and acquisition of MWI Veterinary Supplies, Inc. (MWI). These deals improve ABC's competitive positioning, allowing for better generic drug pricing and enhanced growth opportunities over the near- to medium-term.

The ultimate effectiveness of ABC's strategy to offset stock dilution associated with the pending warrant exercises by Walgreens in 2016 - 2017 is at this time uncertain, as an increasing stock price may result in the need for additional cash outflows to fully offset warrant-related dilution. Given elevated pro forma gross debt/EBITDA exceeding 2x, the use of cash that hinders the firm's ability to repay debt is the key credit risk in 2015 - 2017.

Solid liquidity and strong operational cash generation provide an offset to the aforementioned risk. Fitch expects strong EBITDA growth and debt repayment of \$1.6 billion to facilitate a return to gross debt/EBITDA below 1.4x by year-end 2017.

Rating flexibility is limited and will likely remain so into fiscal 2017. Though more stretched lately, ABC management has historically illustrated a commitment to operating with low debt leverage and responsible allocation of capital.

RATING SENSITIVITIES

Maintenance of the 'A-' ratings will require Fitch's expectation that gross debt/EBITDA will return to 1.3x - 1.4x or below by the end of ABC's fiscal 2017. Annual FCF exceeding \$1 billion in 2015 - 2017, plus the use of a significant portion of ABC's current cash balances, will likely be required to accomplish the \$1.6 billion of debt repayment over this timeframe.

Given ABC's currently elevated pro forma debt leverage, the key risk to the ratings is the relative uncertainty with respect to the amount of cash that will be needed to offset un-hedged warrant-related dilution in 2017. Although not currently expected to occur, ABC's election to direct cash toward dilution-offsetting share repurchase instead of repayment of the 2017 notes such that the aforementioned debt leverage targets would not be reached could lead to a downgrade to 'BBB+'.

Importantly, Fitch notes that elevated leverage is partially the result of temporary debt funding for a special share repurchase program aimed at offsetting warrant-related dilution. Those notes, which were issued in May 2014, are expected to be redeemed when they mature in 2017. The Negative Outlook reflects this temporary financing in the context of a longer-than-usual de-leveraging timeframe.

Other negative ratings momentum could be caused by greater and more direct pricing pressures than Fitch currently expects and/or by a transaction which drives leverage sustainably above 1.3x - 1.4x, or that illustrates a material departure from ABC's traditional commitment to its core drug distribution business.

An upgrade to 'A' is not expected over the ratings horizon. Because of the business's inherent low margins, Fitch believes ABC's management would need to commit to operating with gross debt leverage below 0.75x to achieve an upgrade to 'A'. Fitch does not expect ABC to commit to operating with such low leverage in the near to intermediate term.

KEY FORECAST ASSUMPTIONS

--Revenue growth of 10% in fiscal 2015, and approximately 6% in 2016 - 2017.

--Incorporates the impact of Hepatitis C drugs, MWI, and the Walgreens onboarding annualization, plus underlying market growth of 3% - 4%.

--Double-digit Fitch-calculated EBITDA margin expansion in 2015, and mid-single digits in 2016 - 2017.

--Incorporates the impact of the remaining Walgreens generics onboarding and strong overall drug pricing, offset by lower-margin Hepatitis C products.

--FCF of \$2 billion in 2015, and \$1 billion to \$1.5 billion in 2016 - 2017.

--Incorporates annual capital expenditures of at least \$300 million and moderate dividend increases.

--Total debt repayment and share repurchases of \$1.6 billion and \$5 billion in 2015 - 2017.

--Incorporates the expectation for accelerated repayment of the \$1 billion term loan and the redemption of the \$600 million of 1.15% senior notes in 2017 upon maturity. Fitch assumes share repurchase activity in 2015 per management's public guidance, and share repurchases in excess of warrant proceeds of approximately \$700 million to \$1 billion in each of 2016 and 2017.


Fitch has affirmed ABC's ratings as follows:

--Long-term IDR at 'A-';
--Senior unsecured bank facility at 'A-';
--Senior unsecured notes at 'A-';
--Short-term IDR at 'F2';
--Commercial paper rating at 'F2'.