(Bloomberg) — Walgreens Boots Alliance Inc. had its senior unsecured credit rating cut to nil by Moody’s Investors Service, with the credit rater citing the drugstore chain’s high debt load relative to earnings and associated risks in its efforts to offer more health services.
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The downgrade to Ba2 – two steps to high yield – reflects “Walgreens’ stubbornly high financial leverage, weak interest coverage and stressed free cash flow that Moody’s expects will be sustained over the next 12 to 18 years.” months,” wrote Chedly Louis, credit manager. in a note Monday.
Walgreens shares fell as much as 2.9% after the downgrade, erasing an earlier gain.
“We are disappointed by Moody’s decision today and the limited time provided to demonstrate the results of our deleveraging efforts and planned actions to improve underlying business performance,” a Walgreens representative said in a statement. .
Walgreens still has the lowest investment grade ranking by S&P Global Ratings, and is not rated by Fitch Ratings. Companies that are classified as junk by two credit raters are considered “fallen angels” and have their debt transferred to high-yielding indexes.
Walgreens paid down its debt in its 2023 fiscal year and says it will continue to do so next year. But the cost of the new strategy and a weaker consumer environment will likely cause the company’s debt to peak at around 6 times its earnings before interest, taxes, depreciation and amortization at the end of fiscal 2024 , according to the note, before straightening up. in 2025.
Moody’s announced in October that it was considering downgrading the company’s rating. His current outlook on Walgreens is stable.
Health Pivot
Moody’s decision comes as Walgreens moves away from pharmacy operations to focus more on patient care, a transition that has revealed cracks in its business model.
Walgreens has announced plans in recent months to close 450 stores and cut 10% of its workforce to focus more on patient care. In October, Moody’s warned that Walgreens was at risk of losing its investment grade status, citing a decline in profitability. For example: Its new U.S. health care business, which includes CityMD urgent care centers, lost more money than expected, Moody’s said at the time.
At the same time, Walgreens has accumulated a total liability of $7.4 billion in opioid-related claims and settlements, according to an S&P report that prompted the credit rating organization to lower the company’s outlook based in Deerfield, Illinois, from stable to “negative” in 2017. July. Walgreens also lowered its profit forecast for the full year.
Walgreens announced a $1 billion cost-cutting program on Oct. 12 and said it aims to reduce its capital spending by about $600 million as it prepares for the arrival of the new CEO Tim Wentworth, who took office on October 23.
The rating downgrade impacts about $12.3 billion in corporate debt at Walgreens, according to data compiled by Bloomberg.
Rival CVS Health Corp. has also faced operational pressures amid a similar shift toward more healthcare offerings.
In its latest results, CVS warned investors to have cautious expectations for 2024 as the healthcare giant grapples with rising costs in its pharmacy and insurance businesses. CVS also previously announced a restructuring plan to streamline operations and cut costs, which included cutting 5,000 non-customer-related positions, as the Woonsocket, Rhode Island-based company works to free up capital for investments in its healthcare business.
(Corrects timing of note to Monday in second paragraph and corrects reference to Moody’s warning to Walgreens, not CVS, in ninth paragraph.)
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