Fitch Ratings has downgraded Bausch Health Companies' (BHC) and Bausch Health America's (BHA) (collectively herein: Bausch Health) IDRs to 'RD' from 'C' and has upgraded the IDRs to 'CCC' post the distressed exchange.
The two-step rating actions reflect Fitch's recording of the Restricted Default related to the distressed debt exchange and subsequent re-rating of the post exchange capital structure.
Bausch Health's 'CCC' IDRs reflect Fitch's view that there is substantial credit risk and default is a real possibility despite the debt reduction achieved in the exchange and the lack of debt maturities until late 2025. A material portion of cashflows derived from XIFAXAN are at-risk and default and refinancing risk would increase further should Bausch Health advance its separation of Bausch + Lomb (BLCO) and/or before a favorable resolution of XIFAXAN.
In addition, Fitch has taken the following ratings on Bausch Health's debt instruments: affirmed BHC's and BHA's unsecured debt ratings at 'C'/'RR5' and subsequently upgraded them to 'CC'/'RR6'; downgraded BHC's and BHA's secured first-lien debt to 'B'/'RR1' after maintaining the RWN on them when at 'BB-'/'RR1'; assigned a 'B'/'RR1' rating to BHC's newly issued first-lien notes; and assigned a 'B-'/'RR2'/Negative Watch rating to BHC's newly issued second-lien debt.
The Rating Watch Negative on the second-lien debt reflects the risk of further downgrades in the event Bausch Health advances its separation of BLCO related specifically to lower recovery prospects in the event of default and independent of any related rating actions on the IDRs should that event occur. Resolution of the watch may occur more than six months in the future.
Key Rating Drivers
Distressed Debt Exchange Complete: The rating actions followed BHC's completion of a DDE with BHC's and BHA's senior unsecured issuances. BHC issued $1.77 billion of first-lien notes; $352 million of second-lien notes and $999 million of first-lien notes out of its unrestricted subsidiary, 1375209 B.C. LTD. (herein: Intermediate Holdco). The net proceeds of the issuance were used to exchange its unsecured notes maturing in 2025 through 2031 and reduced the face value of debt by $2.5 billion. Fitch viewed this transaction as a DDE, as there was a material reduction in the original terms for these unsecured issuances and there is a likelihood for a significant deterioration in credit quality on a forward-looking basis, assuming BHC is unsuccessful at defending XIFAXAN patents that are currently being challenged and the potential separation of BLCO.
Material Cashflows At-Risk: A U.S. District court invalidated the patents regarding U.S. patents protecting the composition and use of XIFAXAN for the treatment of IBS-D. The court also held that U.S. patents protecting the composition and use of XIFAXAN for the treatment of hepatic encephalopathy (HE) recurrence are valid.
BHC will appeal the court's anticipated final order, and the FDA may require an in vivo bioequivalency study before approving generic version of XIFAXAN. As such, a generic entrant for the IBS-D indication may be delayed for a time. Nevertheless, the order places revenues and profitability of XIFAXAN at risk, earlier than expected in 2028. If Bausch Health proceeds with the separation of BLCO, the XIFAXAN patent risk is amplified.
'CCC' IDRs Reflect Potential Operating/Financial Stress: The possibility of losing a significant portion of its profitable product, XIFAXAN, poses significant headwinds to the company's operating and financial performance. Cash generation would be meaningfully stressed, hampering the company's ability to fund growth initiatives and leverage would likely rise to high-single digits, at which point refinancing risk would be significant.
The timing of a generic entrant remains unclear, as it depends on the outcome of future litigation and the FDA regulatory approval process. Since 2016, the company significantly reduced the absolute level of Fitch-calculated debt outstanding since with a combination of internally generated cash flow and proceeds from asset divestitures. However, that initiative is at risk.
BLCO Separation Underway: There are limited synergies between Bausch Health 's eye care business and the branded pharma business. However, the potential loss of BLCO's operating and financial stability creates significant risk to BHC's credit profile. BHC already executed an 11% IPO of BLCO in 1H22 and later moved 39% of its interest into an unrestricted subsidiary.
The distressed debt exchange may satisfy some of the requirements needed to distribute the remaining interests through an in-kind transaction. Barring a sale of these interests, which is not expected, there would be no proceeds from such transactions and therefore no potential debt reduction to offset the loss of diversification and cashflows.
Coronavirus Headwinds: The pandemic adversely affected Bausch Health's operating performance during 2020, particularly in the second quarter. The company's Ortho Dermatologics, Dentistry and Global Surgical businesses, which account for roughly 13% of revenues have been hit the hardest. The company adjusted its operations to mitigate some of challenges, including manufacturing and marketing. While Fitch believes the industry is more prepared with protocols, vaccines and therapeutics, some uncertain related to the evolution of the virus remain.
Reliance on New Products: The stabilization of Bausch Health's operating profile relies on an increased focus on developing an internal research and development pipeline, which Fitch believes is constructive for the company's credit profile over the long term. This strategy is not without risk since Bausch Health needs to ramp up the utilization of recently-approved products through successful commercialization efforts. These products include Siliq (for the treatment of moderate-to-severe plaque psoriasis, although with safety restrictions), Bryhali (plaque psoriasis), Lumify (red eye) and Vyzulta (glaucoma). The latter two will move with BLCO post spin.
BHC also has a phase II pipeline candidate for the treatment of ulcerative colitis, two candidates to treat acne and a number of products that it will incorporate into its International business as greenfield geographic expansion opportunities.
Derivation Summary
Bausch Health is significantly larger and more diversified than specialty pharmaceutical industry peers Mallinckrodt plc and Endo International plc. While all three manufacture and market specialty pharmaceuticals and have maturing pharmaceutical products, Bausch Health's BLCO business meaningfully decreases business concentration risk relative to Mallinckrodt and Endo. BLCO offers operational diversification in terms of geographies and payers. However, the proposed complete separation of BLCO will narrow the company's focus.
BHC's rating also reflects gross debt leverage that is higher than peers. But unlike its peers, BHC does not face contingent liabilities related to the opioid epidemic. However, the company does face significant patent expiry risk, which is amplified by the proposed spinoff of BLCO. Bausch Health accumulated a significant amount of debt through numerous acquisitions.
In addition, BHC had a number of missteps in the integration process and other operational issues. Management has focused on reducing leverage by applying operating cash flow and divestiture proceeds to debt reduction and returning the business to organic growth through internal product development efforts.
Parent-Subsidiary Linkage
The approach taken is a weak parent (BHC)/strong subsidiary (BHA). Using its Parent and Subsidiary Linkage Rating Criteria, Fitch concludes there is open ring fencing and access & control. As such, Fitch rates the parent and subsidiary at the consolidated level with no notching between the two.
Key Assumptions
Fitch's Key Assumptions Within The Rating Case for the Bausch Health:
EBITDA of $2.3 billion-$2.4 billion should BLCO be spun off and significantly lower if XIFAXAN patent defense does not prevail;
No material acquisitions, dividends or share repurchases.
BHC can generate meaningful FCF prior to a potential BLCO separation and potentially flat to negative if XIFAXAN patent defense does not prevail and BLCO is separated.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
Favorable resolution of XIFAXAN patent litigation;
BHC chooses not to spin off BLCO before a favorable resolution of XIFAXAN patent litigation.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
BHC completes the spin-off of BLCO prior to a favorable resolution of XIFAXAN patent litigation;
Significant and durable deterioration of FCF generation.
Best/Worst Case Rating Scenario
International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.
Liquidity and Debt Structure
BHC Liquidity: BHC had adequate near-term liquidity at June 30, 2022 including restricted and unrestricted cash on hand of $1.9 billion of which $1.2 billion of the restricted cash will be used to fund the pending settlement with the U.S. securities litigation. The company's amended credit facility includes a $975 million revolver that matures in 2027. At June 30, 2022, the company had $425 borrowings on this facility. The company's most recent refinancing activities have satisfied debt maturities through 2024.
Debt Instrument Notching & Recovery Assumptions: The recovery analysis assumes that Bausch Health would be considered a going concern (GC) in bankruptcy and that the company would be reorganized rather than liquidated. Fitch estimates a standalone reorganized EV for Bausch Health of $10.5 billion and then adds an assumed $1.3 billion to reflect a portion of its interests in BLCO's equity post BLCO fully drawing down on its revolver, resulting in $11.8 billion of EV available for claimants. Fitch assumes that administrative claims consume 10% of this value in the recovery analysis.
Fitch's estimate of BHC's GC EBITDA, excluding BLCO, is $1.5 billion reflecting a scenario where XIFAXAN loses significant market share and the company experiences some shortfalls in commercializing the R&D pipeline. This is a change in the assumption from Fitch's previous review ($1.7 billion) and reflects Fitch assuming a more precipitous decline in operating cashflows.
Fitch assumes a recovery EV/EBITDA multiple of 7.0x for Bausch Health. This is at the higher end of the 6.0x-7.0x Fitch typically assigns to specialty pharmaceutical manufacturers reflecting it being more diversified than many of its peers.
In estimating the value that BLCO contributes to the recovery for Bausch Health's lenders, Fitch assumes equity in BLCO is worth approximately $2.6 billion assuming a fully drawn revolving credit facility. Fitch further assumes that the lenders at BHC and BHA only benefit from the 50.1% interest in BLCO and that the remaining interests held by Intermediate Holdco provide no value.
Fitch applies a waterfall analysis to the going concern EV based on the relative claims of the debt in the capital structure, and assumes that the company would fully draw the revolvers in a bankruptcy scenario. The senior secured credit facility, including the first-lien term loans and revolver, first-lien senior secured notes ($10.1 billion if fully drawn) are rated 'B'/'RR1', three notches above the IDR, the second lien secured notes are rated 'B-'/'RR2' and the senior unsecured notes ($6.2 billion) have poor recovery prospects and are rated 'CC'/RR6'.
Issuer Profile
BHC is a multinational healthcare company headquartered in Laval, Quebec that develops, manufactures and markets pharmaceutical and medical products. It has significantly expanded the scope and geographic reach of its product offering since the initial merger of Bausch Health and Biovail in 2009.
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG Considerations
Bausch Health Companies Inc. has an ESG Relevance Score of '4' for Exposure to Social Impacts due to pressure to contain healthcare spending growth; highly sensitive political environment, and social pressure to contain costs or restrict pricing which has a negative impact on the credit profile, and is relevant to the rating in conjunction with other factors.
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg.
BAUSCH HEALTH COMPANIES INC. 
