Fitch Downgrades Covidien's Ratings; Outlook Negative

Fitch Ratings has downgraded Covidien's Issuer Default Rating (IDR) to 'A-' from 'A' as well as the senior unsecured ratings, which apply to $5 billion of debt at Sept. 26, 2014. Fitch has also removed the Negative Ratings Watch and has assigned a Negative Rating Outlook. A full list of rating actions follows at the end of this press release.

KEY RATING DRIVERS:

--Medtronic, Inc. (NYSE: MDT) completed its $49.9 billion acquisition of Covidien based on Medtronic's Jan. 26, 2015 closing stock price. Consideration included $35.19 cash per share of Covidien's stock plus 0.956 shares of Medtronic stock. The company has stated that it plans to assume and guarantee Covidien's outstanding $5 billion of debt.

--Medtronic recently issued $17 billion of notes, in part, to help finance the transaction. The company stated that pro forma gross leverage will be 3.7x EBITDA at closing and will decline to 2.7x in fiscal 2018, assuming the realization of $850 million of cost synergies.

--The rationale for the transaction includes an improved business mix, as there is only minimal overlap in major product areas. The combined company will certainly touch more clinical areas within healthcare; Medtronic is primarily focused on cardiac devices (cardiac rhythm management and stents) and spine, while Covidien's product lines are focused on general and advanced surgical devices and products that are used across a wide spectrum of medical indications.

--The companies do share the same customer base of hospitals and physicians, so there may be some potential for revenue synergies through consolidated pricing power. The $850 million of synergies Medtronic identified so far are more reliable cost containment items, such as supply chain management and eliminating redundant corporate expense.

--In addition to an improved business mix and cost synergies, tax considerations also support the combination. Covidien is an Irish-domiciled company. Ireland has a 12.5% corporate tax rate and Medtronic, a U.S. company, will re-domicile as an Irish company as a result of the transaction.

--The current effective tax rates of the two companies are not drastically different (Medtronic around 19% and Covidien around 17%) so the effect of lower taxes on income and cash flows will not be very large. However, moving the company's headquarters to Ireland for tax purposes will improve Medtronic's overall available cash flow mix.

RATING SENSITIVITIES:

Fitch previously identified 1.5x total debt-to-EBITDA as leverage consistent with maintenance of an 'A' IDR for Covidien. The ratings were on Negative Watch since the announcement (June 2014) of the pending acquisition by Medtronic. While the acquisition will create a firm with greater scale and reach, the expected increase in pro forma leverage and the expected decline to around 2.7x in FY2018 is a scenario that is more consistent with an 'A-' or a 'BBB+' rating for the combined entity.

DEBT ISSUE RATINGS

Fitch has taken the following rating actions:

Covidien

--Downgrade the IDR to 'A-' from 'A';

--Downgrade the short-term IDR to 'F2' from 'F1'.

Covidien International

--Downgrade the credit facility to 'A-' from 'A';

--Downgrade the senior unsecured notes to 'A-' from 'A';

--Downgrade the commercial paper program to 'F2' from 'F1'.

The Rating Outlook is Negative.

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

Applicable Criteria and Related Research:

--'Corporate Rating Methodology' (May 28, 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=978702

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