Rating Action Overview

• Global biotherapeutics company CSL Ltd.'s (CSL) additional US$534 million equity raising accelerates the company's deleveraging efforts post acquisition of Switzerland-based specialty pharmaceutical group Vifor Pharma AG.
• CSL will finance the US$11.7 billion acquisition with a mix of new debt, existing cash balances, and equity issuances, with incremental debt of about US$6.0 billion to part fund the acquisition. We expect CSL's S&P Global Ratings adjusted debt to EBITDA will increase above 2.0x, which is outside our expectations for the 'A-' rating. However, management has a credible deleveraging strategy over the next 18 months, in our view.
• We are therefore affirming our 'A-' long-term issuer credit rating on CSL, as well as the related issue ratings on the company. We removed all ratings from CreditWatch, where we had placed them with negative implications on Dec. 16, 2021. At the same time, we have affirmed the 'A-2' short-term rating.
• The negative outlook reflects our view that the incremental debt burden to part fund the acquisition will cause leverage to increase above adjusted debt to EBITDA of 2.0x. It also reflects the view that the company's credit metrics could remain above our tolerances for the 'A-' rating level if it experiences any unexpected operational issues or if the integration benefits from the Vifor acquisition are not realized in a timely manner.

Rating Action Rationale

We affirmed our issuer credit rating on CSL given the company's financial deleveraging path following the completion of the transaction to below the 2.0x debt to EBITDA level. CSL's acquisition of Vifor will meaningfully increase leverage upon completion of the transaction. We expect the additional US$6.0 billion debt funding (plus US$2.0 billion of available cash) required to part fund the acquisition to cause CSL's financial leverage to exceed our credit metric expectations for the 'A-' rating. We expect debt to EBITDA to remain above 2.0x for a prolonged period. But we see a credible deleveraging trajectory under which the financial metrics return to levels that support our expectation for the 'A-' rating within 18 to 24 months of the transaction completing. In our view, the additional US$534 million raised through a separate non-underwritten Share Purchase Plan (SPP) accelerates the company's deleveraging path. However, the negative outlook incorporates the risk that CSL's credit metrics could remain above the 2.0x level for a prolonged period. This could occur if it experiences any operational hurdles, the projected earnings profile of both Vifor and CSL do not materialize, or acquisition integration efforts progress slower than we expect.

We expect CSL to prioritize financial deleveraging following transaction completion.  In our view, management remains committed to maintaining the existing 'A-' rating. However, we believe financial leverage remaining above the 2.0x level for a prolonged period would indicate a more aggressive financial policy, which could warrant downward rating action. Our base-case assumptions do not incorporate any further debt-funded acquisitions or share repurchases until such time that leverage is sustainably below the 2.0x level.

CSL will need to navigate meaningful and complex integration challenges after the acquisition.  There are inherent risks associated with an acquisition of this size and nature. However, we believe the amalgamation and integration of Vifor into the CSL business can be successfully managed. We note the company's previous acquisition track record and that Vifor will continue to operate as a separate business division. However, an acquisition of this size (adding about 20% to consolidated EBITDA) will require considerable management resources to ensure Vifor is successfully integrated within the CSL group. Further, CSL's ability to successfully negotiate existing relationships and licensing agreements that Vifor has with its partners will be pivotal to the success of CSL's integration efforts. Leveraging off these relationships should also enable CSL to extract sustainable long-term earnings benefits from the combination.

Post-acquisition we do not believe that CSL's business is materially strengthened.  Despite our overall favorable view of CSL's current business, we believe the degree to which the addition of Vifor bolsters the company's business risk profile is limited. This is largely driven by a combination of Vifor's comparatively modest earnings base, predominant exposure to relatively smaller global therapeutic markets, high product concentration, and its dependence on external research for product development. However, we acknowledge the additional earnings diversification Vifor will add to CSL's current business mix as a third business division alongside CSL Behring and Seqirus. CSL and Vifor's therapeutic areas of expertise also complement each other; and we expect the acquisition to create adjacencies, especially in the anemia and nephrology fields. CSL will seek to use Vifor's key competencies in complex manufacturing and supply-chain operations. The addition of Vifor could also broaden CSL's product pipeline. As a result, we see credit quality benefits from this additional diversification and view CSL as being differentiated from its peers as the market leader in plasma therapies.

Outlook

The negative outlook reflects the sizeable incremental debt burden associated with CSL's acquisition of Vifor Pharma, which will temporarily increase its adjusted leverage above 2.0x. The outlook also incorporates the risk that the company's credit metrics could remain above our tolerances for the 'A-' rating if it experiences any operational hurdles or if integration efforts progress slower than we expect.

Downside scenario

We could lower the rating if, following transaction completion, we expect CSL to sustain its debt to EBITDA above 2x beyond the next 18 to 24 months. This could occur if the company experiences unexpected operational issues or if the integration benefits from the Vifor acquisition do not materialize as planned.

Downward rating pressure would also be likely if CSL undertook shareholder friendly actions or additional debt-funded acquisitions that resulted in leverage remaining above 2.0x.

Upside scenario

We could revise the outlook on CSL to stable if we believe that debt to EBITDA will improve and stabilize below 2x. This could occur if CSL prioritizes debt reduction, demonstrates solid progress on its integration of Vifor Pharma, and if impediments to the continuity of plasma supply dissipate over the next 18 to 24 months.

Company Description

CSL is a global biotherapeutics company that specializes in the development, manufacture, marketing, and distribution of a diverse range of biotherapies. These include plasma-derived and recombinant products, vaccines, and antivenom.

CSL operates through two main subsidiaries, CSL Behring and Seqirus. CSL Behring is a global provider of plasma-derived and recombinant products. It operates one of the world's largest plasma collection networks through CSL Plasma. Through the acquisition of Novartis' influenza assets in 2015, Seqirus has become the second-largest influenza vaccine company in the world. CSL has seven manufacturing facilities across Australia, Germany, Switzerland, China, the U.K., and the U.S. The company is headquartered in Melbourne.

Our Base-Case Scenario

• Real GDP growth for calendar years: U.S.: 3.9% in 2022 and 2.7% in 2023; China: 4.9% in 2022 and 4.9% in 2023; Eurozone: 4.4% in 2022 and 2.4% in 2023; Australia: 3.5% in 2022 and 2.8% in 2023; and Asia Pacific 5.1% in 2022 and 4.6% in 2023.
• CSL's revenue growth to remain subdued in fiscal 2022 at about 5%, reflecting the ongoing impacts to plasma collection and reduced elective procedures limiting growth in sales of specialty products. However, revenue growth is expected to increase to about 12%-13% during fiscal years 2023 and 2024, driven in large part by continued strong demand for immunoglobulins and strong growth in the Seqirus business;
• Relatively flat EBITDA margin of about 32%-33% during fiscal 2022 and 2023 given the increased cost of plasma collection;
• Additional cost savings or synergies are not incorporated into our base-case scenario;
• Capital expenditure (capex) of between US$1,500 million-US$1,700 million over the next two years;
• Dividend payout ratio to be maintained in line with historical levels around 40% of net profit after tax; and
• No large debt-funded acquisitions or share buybacks over the next few years.

Liquidity

We consider CSL's liquidity as adequate. We forecast the group's sources of liquidity will exceed uses by more than 1.2x over the 12 months ending Dec. 31, 2022. We also expect net sources and uses of liquidity to remain positive, and the company to remain compliant with financial covenants, even if EBITDA decreases by 15% from our base-case assumption.

We note CSL is targeting to complete its acquisition of Vifor in mid-2022. CSL plans to part fund the acquisition with incremental debt of about US$6.0 billion new debt, and existing cash and undrawn facilities of US$2.0 billion. In addition, the company will fund the remainder of the total acquisition costs of about US$12.5 billion (inclusive of transaction costs and refinancing of Vifor indebtedness) via a US$534 million non-underwritten SPP and US$4.5 billion institutional equity placement.

We expect the acquisition to further bolster CSL's cash generation capacity. As such, we believe the company will generate sufficient cash flow to support its adequate liquidity. In our view, the combined entity's robust free cash flow generation will likely accommodate CSL's capex requirements associated with investments in plasma collection and fractionation capacity, increases in R&D spending, and any additional licensing agreements.

Also, supporting our assessment of the CSL's liquidity position is the group's well spread debt maturity profile, its solid banking relationships, and good standing in global debt capital markets. As of Dec. 31, 2021, we expect CSL to have the following sources and uses of liquidity over the next 12 months:

Principal liquidity sources:

• Cash and cash equivalents of about US$6.2 billion, including proceeds from the US$534 million non-underwritten SPP and US$4.5 billion institutional equity placement;
• US$1.5 billion in undrawn bank lines; and
• Cash funds from operations of US$3.4 billion-US$3.5 billion in 2021.

Principal liquidity uses:

• Capex of US$1.5 billion-US$1.7 billion in 2022;
• About US$180 million of debt maturing in 2022;
• Working capital outflow of US$500 million-US$600 million in the period;
• Dividend payout ratio to be about 40% of net profit after tax; and
• Total acquisition costs of about US$12.5 billion.

Covenants

We note CSL's financial covenants exclude the impact of AASB 16 and the impact lease liabilities have in the calculation of the ratio of net debt to EBITDA. We understand the prescribed net debt-to-EBITDA ratio must remain below 3.0x. We believe the group has sufficient covenant headroom, but that will reduce following the Vifor acquisition.

Ratings Score Snapshot

Issuer Credit Rating: A-/Negative/A-2

Business risk: Satisfactory

• Country risk: Low
• Industry risk: Low
• Competitive position: Satisfactory

Financial risk: Intermediate

• Cash flow/Leverage: Intermediate

Anchor: bbb

Modifiers

• Diversification/Portfolio effect: Neutral (no impact)
• Capital structure: Neutral (no impact)
• Liquidity: Adequate (no impact)
• Financial policy: Positive (+1 notch)
• Management and governance: Strong (no impact)
• Comparable rating analysis: Positive (+1 notch)

Stand-alone credit profile: a-

Related Criteria

• General Criteria: Environmental, Social, And Governance Principles In Credit Ratings, Oct. 10, 2021
• General Criteria: Group Rating Methodology, July 1, 2019
• Criteria | Corporates | General: Corporate Methodology: Ratios And Adjustments, April 1, 2019
• General Criteria: Methodology For Linking Long-Term And Short-Term Ratings, April 7, 2017
• Criteria | Corporates | General: Methodology And Assumptions: Liquidity Descriptors For Global Corporate Issuers, Dec. 16, 2014
• General Criteria: Methodology: Industry Risk, Nov. 19, 2013
• General Criteria: Country Risk Assessment Methodology And Assumptions, Nov. 19, 2013
• Criteria | Corporates | General: Corporate Methodology, Nov. 19, 2013
• General Criteria: Methodology: Management And Governance Credit Factors For Corporate Entities, Nov. 13, 2012
• General Criteria: Principles Of Credit Ratings, Feb. 16, 2011

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