Moody's Investors Service downgraded Novartis AG's corporate family rating to A1 from Aa3 following the Swiss pharmaceutical giant's plans to spin off its eye care business and execute a share buyback.
The outlook on the ratings is stable, and a rating upgrade is unlikely to materialize in the near term, Moody's said.
The spinoff of Alcon Inc. into a stand-alone company, which is subject to shareholders' approval, will make Novartis a less diverse company, even though the sale will add to the pharmaceutical company's profit margins, the credit rating agency said. Novartis' business profile is increasingly skewed toward innovative medicines, which Moody's believes carry a higher risk profile overall.
Novartis' share buyback of up to $5 billion prioritizes shareholder distribution over reimbursement of debt at a time when the company's credit metrics have already been weak for a long period of time, Moody's said.
The agency added that the stable outlook reflects its view that Novartis will gradually rely less on borrowed money, reducing its leverage to close to 2.5x as growth in EBITDA accelerates beyond 2019.
A return to an Aa3 rating would require a ratio of debt to EBITDA below 2x on a sustainable basis, with the ratio of cash flow from operations to debt in the high 40s, Moody's said.
The A1 rating could come under pressure if the debt-to-EBITDA ratio fails to drop below 2.5x or if the cash from operations-to-debt ratio does not improve toward 40% over time, the agency added