Fitch Downgrades Teva's Credit Rating to Junk, Citing Operational Difficulties

Teva will find it hard to pay back its $34.7 billion in debt because of lower generic prices in the U.S., says Fitch

Yoram Gabison
Yoram Gabison
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FILE PHOTO: An employee of Teva Pharmaceutical Industries wears a shirt bearing the company's logo at its Jerusalem oral solid dosage plant (OSD) December 21, 2011. REUTERS/Ronen Zvulun/File Photo GLOBAL BUSINESS WEEK AHEAD - SEARCH GLOBAL BUSINESS 8 MAY FOR ALL IMAGES
Yoram Gabison
Yoram Gabison

The Fitch ratings agency downgraded Teva Pharmaceutical Industries' credit rating on Monday to the level of junk. Fitch gave the Israeli generic drug maker a BB rating with a negative outlook, down from BBB-, the lowest rating for investment grade bonds. The negative outlook means Fitch believes Teva’s ratings will likely move even lower over the next year or two.

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Fitch explained its downgrade for Teva to junk levels as being due to the company’s expected difficulties in finding ways to pay off its $34.7 billion in debt.

Fitch analyst Patrick Finnegan said Teva is facing growing operational difficulties, citing the erosion of the prices for generic drugs in the United States and the loss of exclusivity for its flagship Copaxone drug for the treatment of multiple sclerosis, the company’s main profit center.

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These two developments at the same time will reduce Teva’s free cash flow and force it to sell more assets and raise external financing to meet its debts, Finnegan said.   

Standard & Poor’s Global Ratings and Moody’s still rate Teva bonds as investment grade – for now – but at their very lowest levels only one notch above junk rating.  Moody’s downgraded Teva's bonds in August and S&P lowered Teva’s local currency bond rating in September.  On Friday, S&P lowered its outlook for Teva to negative for similar reasons as those stated by Fitch.

The loan agreements between Teva and the banks that had put together the financing package to pay for Teva's $39.3 billion purchase of Actavis Generics in August 2016 permit the lenders to raise interest rates on their $6 billion in loans by 0.25% for every notch Teva is downgraded. But this agreement only applies to ratings from Moody’s and S&P and not Fitch, so for now these interest rates will remain unchanged. If such a downgrade does occur, it would cost Teva about $15 million in additional interest payments a year.

Teva’s new president and CEO, Kare Schultz, took the reins at the company just last week.