Fitch Rates Thermo Fisher's Senior Notes 'BBB'; Outlook Stable

Fitch Ratings has assigned a 'BBB' rating to Thermo Fisher Scientific Inc.'s (Thermo Fisher) USD800 million 3- and 10-year senior notes offering. The proceeds of the issue will be used to redeem the outstanding $900 million aggregate principal amount of the company's 3.20% senior notes due March 1, 2016. The Rating Outlook is Stable.

The ratings apply to $13.2 billion of debt at Sept. 26, 2015. The ratings also apply to Thermo Fisher's EUR425 million senior notes issued in November 2015. The proceeds of the euro-denominated notes will be used to redeem the entire outstanding $400 million aggregate principal amount of 3.50% senior notes due 2016 issued by Thermo Fisher's subsidiary, Life Technologies Corporation (Life Tech), which mature Jan. 15, 2016. The early call notice for these notes has been issued and the settlement is scheduled for Dec. 14, 2015.

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

KEY RATING DRIVERS

Thermo Fisher has demonstrated solid and consistently paced improvement in credit metrics since the first-quarter 2014 (1Q14) acquisition of Life Tech. The transaction added $11.3 billion of debt to the capital structure and resulted in a one-notch downgrade of the ratings.

Through 315, Thermo Fisher has applied the majority of free cash flow (FCF; CFO less capital expenditures and dividends) plus about $1 billion in proceeds from business divestitures to debt reduction, reducing the post-acquisition debt balance by about $4 billion.

At Sept. 26, 2015, Fitch calculates gross leverage of 3.1x, versus a pro forma level of 4.5x at the end of 2013. Maintenance of the 'BBB' rating contemplates Thermo Fisher reducing gross leverage to 3.0x or below by the end of 2015. Fitch views Thermo Fisher's current leverage as largely in line with the 3.0x target that Fitch articulated as consistent with a 'BBB' rating in the wake of the company's acquisition of Life Tech in early 2014.

Fitch forecasts Thermo Fisher will produce FCF of around $2.4 billion in 2015, which is sufficient to accomplish necessary debt reduction. It is likely that the company will also deploy capital for bolt-on acquisitions. As long as this does not derail progress in deleveraging, it is not likely to result in a downgrade of the ratings.

EBITDA growth should also contribute to leverage reduction. The integration of the Life Tech business is proceeding smoothly, demonstrated by Thermo Fisher raising the target for cost synergies; revenue synergies should also be a tailwind to growth in 2015.

KEY ASSUMPTIONS

--Thermo Fisher's gross debt leverage drops to 3.0x by the end of 2015 as a result of $670 million of debt repayment.

--Organic currency-neutral revenue growth of about 3% in 2015-2016. This reflects Fitch's general expectations for growth in the life sciences sector. Persistent headwinds in academic and government end markets in developed markets will be offset by good growth in emerging markets and by faster growth in the healthcare and diagnostics end markets.

--The operating EBITDA margin rises slightly through the end of 2016 due to some continued cost benefits from the integration of Life Tech, as well as a stable to slightly improving pricing environment.

--CFO is sufficient to fund a slightly increasing dividend, a small number of bolt-on acquisitions, and at least $1 billion of modeled annual share repurchases beginning in 2016.

RATING SENSITIVITIES

Thermo Fisher's favorable business profile, with significant scale, good end-market diversification and improved product mix following the Life Tech acquisition, supports the ratings. Therefore, rating actions are more likely to be triggered by capital deployment decisions than by an operational stress scenario.

Maintenance of the 'BBB' Issuer Default Rating contemplates Thermo Fisher reducing leverage to 3.0x total debt-to-EBITDA by the end of 2015. A downgrade could result if the company fails to meet this target because of cash deployment for acquisitions or shareholder pay-outs, delays in debt repayment, or lack of EBITDA growth. A near-term positive rating action is not anticipated, since it would require a commitment from the company to maintain leverage below 2.5x.

AMPLE LIQUIDITY

Thermo Fisher's ample liquidity supports the 'BBB' credit profile. At Sept. 26, 2015, sources of liquidity included $503 million of cash on hand, $1.9 billion of available capacity on the bank facility revolving loan and LTM FCF of $1.9 billion. The credit facility is back-up for the commercial paper (CP) program and if the revolver is drawn the company intends to leave an available balance at least equal to the amount of CP outstanding.

The debt maturity schedule of the company's senior notes is well laddered. Thermo Fisher used a high proportion of debt with a relatively short tenure to facilitate rapid deleveraging post the acquisition of Life Tech. Since the close of the acquisition, $4 billion of cash and asset sale proceeds have been used to pay down short-term debt. The proceeds of recent notes issuances, including the EUR425 senior notes due 2020 and the proposed $750 million USD notes issuance, provide additional liquidity to address 2016 note maturities.

Life Tech had approximately $1.5 billion of senior notes due 2016, 2020 and 2021 prior to the acquisition that remain outstanding. Life Tech is now a wholly-owned operating subsidiary of the parent company, Thermo Fisher Scientific, Inc. The parent company is the issuer and obligor of all other debt in the capital structure. There are no upstream or downstream guarantees of the debt outstanding at either of the parent or Life Tech subsidiary level.

The debt issued by the Life Tech subsidiary is therefore structurally senior to the debt outstanding at the parent level to the extent of the assets of the subsidiary. Despite the lack of guarantees and a potentially stronger financial profile at the Life Tech subsidiary, the ratings are equalized at the parent's 'BBB' rating since Fitch believes there are strong operational and strategic linkages between the parent and subsidiary. Furthermore, Thermo Fisher consolidates the results of the Life Tech subsidiary at the parent company level. Without stand-alone financials at the subsidiary level Fitch cannot assess its financial status on an on-going basis.

FULL LIST OF RATING ACTIONS

Fitch currently rates Thermo Fisher as follows:

Thermo Fisher Scientific, Inc.

--Long-term IDR and senior notes 'BBB';

--Short-term IDR 'F2';

--Commercial paper 'F2'.

Life Technologies Corp.

--Long-term IDR and senior notes 'BBB'.

The Rating Outlook is Stable.

Date of relevant rating committee: Dec. 17, 2014

Additional information is available on www.fitchratings.com

Applicable Criteria

Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 17 Aug 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869362

Additional Disclosures

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=995561

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https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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