Fitch Rates Quest Diagnostics' Bond Offering 'BBB'; Outlook Stable

Fitch Ratings has assigned a 'BBB' rating to the $1.2 billion bond offering by Quest Diagnostics Inc. (Quest; NYSE: DGX). The Rating Outlook is Stable.

A full list of ratings follows at the end of this release.

Fitch expects the bond proceeds, as well as internal liquidity sources, to be used to repay up to $1,275 million of outstanding debt and associated fees during 2015, including:

--$500 million of 5.45% senior notes due November 2015;

--$375 million of 6.4% senior notes due July 2017;

--$150 million (50%) of the 3.2% senior notes due April 2016;

--Up to $250 million of a combination of its 6.95% senior notes due 2037 and 5.75% senior notes due 2040.

The refinancing will cause reported debt leverage to be temporarily elevated during 2015. But Fitch expects the aforementioned debt to be repaid and total debt balances to be reduced to approximately $3.8 billion, with gross debt/EBITDA between 2.5x and 2.7x, by year-end.

KEY RATING DRIVERS

--Quest is the largest provider of clinical diagnostic and lab services in the U.S. Its scale, scope, and customer diversity contributes to relatively stable operations and margins, albeit facing ongoing pricing and competitive pressures.

--Gross debt/EBITDA of 2.7x at Dec. 31, 2014 is expected to remain toward the upper end of the current 'BBB' ratings and outside Quest's stated long-term target of 2.25x at least through 2015.

--Discretionary cash flows, including FCF of $412 million in 2014, are weaker than historical measures but still adequate. Recently elevated capital spending is a more favorable strain on FCF than the heavy shareholder returns of 2013 and should drive stronger operations going forward.

--The aforementioned refinancing extends most of Quest's near-term debt maturities and, thereby, reduces refinancing risk. But opportunities for debt repayment over the next four years will now be limited to temporary A/R facility borrowings and the $150 million of remaining 3.2% notes due 2016.

--The firm's restructuring programs are helping to offset margin pressures from weak healthcare utilization trends and tightened reimbursement. But EBITDA margins still showed some compression in 2014, the fifth straight year of decline.

RATING SENSITIVITIES

Quest will have limited flexibility at the current 'BBB' ratings for much of 2015. De-leveraging is likely to occur primarily from growing EBITDA, as the firm has limited opportunities for debt repayment following the contemplated refinancing. Organic growth will be difficult given industry headwinds, making EBITDA growth dependent on cost savings and/or M&A funded out of discretionary cash flows.

Negative rating action could stem from sustained weak operating performance, characterized by minimal volume growth due to continued negative healthcare utilization trends and tightened government and commercial reimbursement. Continued EBITDA margin compression and/or incremental debt from leveraging transactions that results in gross debt leverage maintained above 2.7x would be more consistent with a 'BBB-' rating.

Positive rating action is not likely over the ratings horizon.

KEY ASSUMPTIONS

--Relatively flat organic revenues, some benefit from acquisitions annualizing in Q1;

--Relatively flat margins from continuing pricing and competitive pressures, offset by further Invigorate cost savings and improving margins in acquired businesses;

--Operating cash flow in 2015 similar to 2014 measures, with modest increases in capex and dividend payouts.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria & Related Research:

--'Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage' (May 28, 2014);

--'Fitch Downgrades Quest Diagnostics' IDR to 'BBB'; Outlook Stable' (March 12, 2014).

Applicable Criteria and Related Research:

Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749393

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=980804

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