Thursday, May 2, 2013

Moody's Announcement Is Of Very Scant Moment -- Merck Is A Very Safe Credit


I'll have more complete analysis -- with graphics -- in a few minutes, but Moody's announcement of a ratings review should be completely shrugged off. S&P holds Merck at AA-; it is one of the safest debt bets in the corporate world. [Graphic at right derived from page 6 of this Moody's source document. Fair use claimed.]

[And okay -- I can't resist a just little snark, here -- Moody's is generally regarded by corporate treasurers at Fortune 200 companies as the most nervous of the Nellies. Even so, it (and the others, too, to be fair) largely missed calling the financial meltdown of 2008. And that is its main function. End, acidic perspective portion. Back to main topic.]

Overall, Merck remains A1/P1 for short term debt and commercial paper, and thus is a high-end investment grade credit. In the short term markets, it is hard to imagine that Merck couldn't meet its interest obligations, so it is an extremely safe, and stable credit risk. Big pharma (generally) is a cash-cow, so debt rating agencies see them (again, generally) as pretty safe, as corporates go. Patent expiries are essentially scheduled events, so even that class of risks is something the debt markets may easily plan around.

That is to say Merck is right in the middle of the fairway, and would need to fall six notches to be in any danger. Moody's won't drop it more than one notch, and S&P will hold Merck stable.

Net, net -- a non-event.

Here's a bit from the generally-very cogent Linda Johnson (writing for the AP) -- though even this seems a bit too much, about too little:
. . . .The ratings service took exception to Merck's plan to fund the buybacks partly with an unspecified amount of new debt.

"Debt-financed share repurchases are outside our expectations for Merck's previously conservative financial policies and could result in a one-notch rating downgrade," Michael Levesque, Moody's senior vice president, said in a statement. . . .
So -- trust that Merck can easily pay for the buy-back -- though anyone who tells you it is entirely coincidental to the rough quarterly results Merck just posted. . . is fibbing.

This is a smart move, to shore up NYSE prices, during a tough first half -- with the goal being a much stronger set of numbers second half of 2013. And I think Merck can do it. Just as I think Pfizer can -- as I've said, repeatedly this week.

1 comment:

Condor said...

As a footnote, Fitch Ratings reaffirmed Merck's rating, at "A+" today, with outlook negative -- meaning there is a chance that Fitch could drop Merck by one notch, if Fitch perceives Merck's ability to service its debt has decreased in any meaningful way.

Even so, at a flat "A" -- Merck would still be top-shelf, according to the agency's rating scheme.

". . .Merck has ample liquidity via cash on hand and operating cash flow generation to complete the repurchasing activity without harm to the credit profile. However, the plan to partially fund the program through debt financing will halt positive momentum the company gained through solid operational performance through its long patent cliff period. . . ."

We will keep you posted.