Summary
This 8-K filing from Schering-Plough Corporation, filed on February 18, 2004, primarily reports on credit rating downgrades received from Standard & Poor's (S&P), Moody's Investors Service, and Fitch Ratings. S&P lowered Schering-Plough's corporate credit and long-term debt ratings to 'A-' from 'A' and its credit and commercial paper ratings to 'A-2' from 'A-1', with a negative outlook. These downgrades follow similar actions by Moody's and Fitch in late 2003, with Fitch specifically citing concerns over declining sales of the INTRON franchise and reliance on ZETIA and REMICADE for near-term growth. The report also details the implications of these credit rating changes on the company's financial arrangements. While the S&P downgrade did not trigger step-up provisions on recent debt issuances, it did breach minimum rating requirements for two significant interest rate swap arrangements. These breaches allow counterparties to potentially terminate the arrangements, which involve substantial intercompany cash flows and a total of $2.4 billion in prepaid amounts under one arrangement and $1.6 billion under another. However, the company's management believes that early termination of these swap arrangements would not materially impact current liquidity or financial resources due to available financing and repatriation options, including the use of existing tax losses.
Key Highlights
- 1Standard & Poor's (S&P) downgraded Schering-Plough's long-term debt rating to 'A-' from 'A' and commercial paper rating to 'A-2' from 'A-1' with a negative outlook.
- 2Moody's had previously downgraded ratings in October 2003 (corporate credit to 'A-3', commercial paper to 'P-2') and Fitch in November 2003 (senior unsecured/bank loan to 'A-', commercial paper to 'F2').
- 3Fitch cited concerns regarding declining sales of the INTRON franchise and over-reliance on ZETIA and REMICADE for future growth.
- 4The S&P downgrade did not trigger interest rate increases on recent $2.4 billion debt issuance due to specific rating thresholds not being met.
- 5Two key interest rate swap arrangements, with total prepaid amounts of $2.4 billion and $1.6 billion respectively, have had their minimum credit rating triggers breached (requiring 'A2'/'A' from Moody's/S&P).
- 6Counterparties to these swap arrangements can call for early termination, but management indicates this is not imminent and current liquidity is not expected to be materially impacted due to financing and tax considerations.