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Moody's reviews PharMerica ratings for downgrade after merger announcement

Moody's placed the ratings of pharmacy services company PharMerica Corp., including its B2 corporate family rating and B2-PD probability of default rating, under review for downgrade.

The ratings action comes after Louisville, Ky.-based PharMerica disclosed that it will merge with BrightSpring Health Services, which is also based in Louisville. Private equity firm Onex Corp. said last week that it was selling BrightSpring to an unnamed buyer.

Moody's said its review will focus on the merged companies' capacity to use debt to acquire additional assets, capital structure and potential for debt service. The scale, diversity, possibilities for synergies, and the potential for disruption in operations from the merger and integration will also be reviewed, Moody's said.

The rating agency's review for downgrade is based on the expectation that PharMerica has high financial leverage and high reimbursement risk as almost 75% of its revenue is derived from government programs. According to Moody's, the company has weak profit margins in an intensely competitive business.

Walgreens Boots Alliance Inc.'s minority ownership stake in privately held PharMerica support the company's B2 rating, Moody's said. Cost savings stemming from leveraging Walgreens' purchasing power will enable the company to consistently generate positive free cash flow ranging from $50 million to $80 million per year.

Moody's expects PharMerica's credit risk profile to either stay the same or weaken after the merger based on the history of leveraged acquisitions by Kohlberg Kravis Roberts & Co. LP, majority owner of PharMerica.

Kohlberg Kravis Roberts recently completed the $1.4 billion acquisition of PharMerica in partnership with Walgreens.