TEXT-S&P cuts IMS Health rating to 'B+'

(The following statement was released by the rating agency) Overview

-- Health care information, services, and technology provider IMS Health Inc. is issuing an additional $1.25 billion of debt to fund a sponsor dividend of about $1.2 billion.

-- Pro forma leverage will increase to 5.7x from 4.2x as of June 30, 2012, a departure from our previous assessment of the company's financial policies.

-- We are lowering our corporate credit rating on the company to 'B+'.

-- We are assigning IMS' proposed $750 million term loan B our 'BB-' issue-level rating and '2' recovery rating, and assigned the company's $500 million senior unsecured notes our 'B' issue-level rating and '5' recovery rating.

-- The stable outlook reflects our expectation that IMS will continue to generate organic growth and free cash flow but that the company will first use any increase in debt capacity for shareholder-friendly actions.

Rating Action On Oct. 11, 2012, Standard & Poor's Ratings Services lowered its corporate credit rating on IMS Health Inc., a Danbury, Conn.-based provider of information, services and technology for the healthcare industry, to 'B+' from 'BB-'. The outlook is stable.

At the same time, we lowered our issue-level rating on the existing term loan B to 'BB-' in conjunction with the downgrade. The recovery rating is unchanged at '2', indicating our expectation for substantial (70% to 90%) recovery in the event of payment default. We also lowered our issue-level rating on the existing unsecured notes to 'B' in conjunction with the downgrade. The recovery rating on this debt is unchanged at '5' (10% to 30% recovery expectation).

We assigned the company's proposed $750 million term loan B our 'BB-' issue-level rating with a recovery rating of '2' (70% to 90% recovery expectation). We also assigned the proposed $500 million senior unsecured notes our 'B' issue-level rating with a recovery rating of '5 (10% to 30% recovery expectation).


The rating downgrade follows the company's announcement that it will be issuing $1.25 billion of additional debt to fund a sponsor dividend. TPG, the Canadian Pension Board, and Leonard Green & Partners acquired the company in February 2010. Pro forma leverage will increase to 5.7x, slightly higher than the leverage incurred when the sponsors acquired the company in 2010, and a departure from our expectation that leverage would remain below 5x on an ongoing basis.

The rating on IMS Health Inc. reflects its "highly leveraged" financial risk profile (according to Standard & Poor's Ratings Services' criteria), highlighted by our expectation of leverage sustained at more than 5x over the near term. We believe IMS has a "satisfactory" business risk profile because of its dominant position as a provider of critical information to the pharmaceutical market, offset by its narrow focus in providing information primarily to that market.

We expect revenue growth of 4% for 2012, in line with IMS' first-half revenue performance. EBITDA margins in the low-30% range are also trending in line with our expectation. Over the next year, we believe IMS will continue to generate low-single-digit organic revenue growth, reflecting the overall demand for outsourced pharmaceutical services. We expect EBITDA margins to be sustained in the low-30% range because of organic growth, the benefit of lower selling, general, and administrative expenses (SG&A), and lower operating costs. We expect those margins to support free cash flow generation of at least $300 million, but we believe sponsor ownership could result in IMS using its growing debt capacity and free cash flow for additional shareholder-friendly actions or business development activity. This underpins our belief that, despite free cash flow generation, we will not see permanent debt reduction.

IMS has a highly leveraged financial risk profile, reflected by pro forma leverage of 5.7x. EBITDA growth and the partial use of free cash flow for debt reduction will result in some leverage improvement, although we believe that leverage will still be high, at about 5x, at the end of 2013. Sustained cash generation also supports our belief that funds from operations to total debt will be about 12% by the end of 2013, also in line with a highly leveraged financial risk profile.

IMS' satisfactory business risk profile is predicated on the company's position as the leading provider of critical information to the pharmaceutical market. Its client base is diverse: No one customer accounts for more than 6% of revenues, and nearly every pharmaceutical company is a customer. There are local and country-level competitors, but IMS holds a significant leading global market position. The company's data collection network, with over 175,000 collection points in over 100 countries, is a key competitive advantage and major barrier to entry. IMS' pharmaceutical clients consider many of the company's market data and intelligence services as critical to their business, leading to the relatively high visibility of IMS' annual revenue stream.

Despite its strong competitive position, IMS is narrowly tied to demand from its pharmaceutical clients. It could be susceptible to pharmaceutical industry dynamics, such as pharmaceutical merger and acquisition (M&A) activity and the success of new product launches/near-term product pipelines. The industry is stabilizing after a period of cost cutting and streamlining, but we still believe the industry could struggle to grow over the near term. This is reflected in our expectation of low-single-digit organic revenue growth over the next one to two years. IMS' margins will expand by about 100 basis points over that time because of the shift in service mix, aided by organic growth and continued cost reductions. Although a small part of IMS' business, demand for discretionary consulting services will likely remain muted by the industry's focus on cost, after the record amount of drugs losing patent protection through 2012. Generic drug companies, which benefit from the loss of patent protection on branded drugs, typically use fewer consulting services, but after 2012, demand for this key service could grow if pipelines of the major pharmaceutical companies improve.


We believe IMS has strong liquidity. The business is not capital intensive, and we expect it to generate about $300 million of free cash flow over the near term. Other factors supporting its liquidity profile include:

-- We believe sources of cash will exceed mandatory uses by more than 2x over the next 12 to 24 months;

-- Sources of cash include more than $400 million of cash and full availability of the $375 million revolver, while uses of cash include debt amortization, roughly $100 million of capital expenditures, and about $20 million of working capital;

-- A comfortable cushion underneath the company's covenants;

-- Even if EBITDA declines by 50%, we expect liquidity to continue exceeding the company's needs; and

-- We believe IMS can absorb, without refinancing, high-impact, low-probability events.

Recovery analysis For the complete recovery analysis, see the recovery report that will publish shortly on RatingsDirect.


Our stable rating outlook on IMS Health Inc. reflects our expectation that IMS' size, scale, and clear leadership position will help it sustain EBITDA margins in the low-30% range, which should support continued free cash flow generation, although we do not expect a permanent improvement in its financial risk profile.

An upgrade is unlikely because we believe that IMS' highly leveraged financial risk profile will persist over the next year and also because of the aggressive financial policy of the company's sponsors. In particular, we believe the sponsor could use growing debt capacity or free cash flows to fund another shareholder dividend or for further business development activity, instead of permanent debt reduction. We could lower our rating if our business-risk assessment changes, under the unlikely scenario that IMS' reputation for providing quality, critical data is damaged. A lower rating as a result of a modest cyclical downturn or margin erosion is unlikely given strong liquidity.

Related Criteria And Research

-- Methodology: Business Risk/Financial Risk Matrix Expanded, Sept. 18, 2012

-- Methodology And Assumptions: Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011

-- Criteria Guidelines For Recovery Ratings, Aug. 10, 2009

-- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008

Ratings List Downgraded To From IMS Health Inc. Corporate Credit Rating B+/Stable/-- BB-/Stable/-- Senior Secured BB- BB Recovery Rating 2 Senior Unsecured B B+ Recovery Rating 5 New Rating IMS Health Inc.

$750M sr secd fltg rate term loan B-1 BB-

Recovery Rating 2

$500M sr unsecd 10.00% nts due 2020 B

Recovery Rating 5 IMS AG

$750M sr secd fltg rate term loan B-1 BB-

Recovery Rating 2 IMS Japan K.K.

$750M sr secd fltg rate term loan B-1 BB-

Recovery Rating 2

Complete ratings information is available to subscribers of RatingsDirect on the Global Credit Portal at

. All ratings affected by this rating action can be found on Standard & Poor's public Web site at . Use the Ratings search box located in the left column. (New York Ratings Team)

((e-mail: pam.niimi@thomsonreuters.com; Reuters Messaging: pam.niimi.reuters.com@reuters.net; Tel:1-646-223-6330;))