Standard & Poor’s Ratings Services, Moody’s Investors Service and Fitch Ratings all either demoted Medtronic’s debt or the Covidien debt it assumed in the deal – although, interestingly, Moody’s did raise its rating on Covidien’s debt.
Moody’s said the merger prompted it to downgrade Medtronic’s senior unsecured ratings to A3 from A2 and its short-term rating to Prime-2 from Prime-1, lowering its rating outlook to negative. But Moody’s also said it’s upgrading Covidien’s senior unsecured debt rating to A3 from Baa1. The $50 billion deal closed Jan. 26.
"The upgrade is supported by Moody’s opinion that Covidien’s existing bondholders are moderately better off because they now receive downstream guarantees from A3-rated Medtronic, but will not be required to provide upstream guarantees," according to a press release. "However, Moody’s is not making a rating distinction between any of the debt in Medtronic’s capital structure because of the solid credit strength of the combined entity, the very low probability of default, and the downstream guarantees from entities at or near the top of the corporate structure. Existing debt issued by Covidien – along with all other Medtronic debt – will have downstream guarantees from Medtronic plc, the new parent entity, which will be domiciled in Ireland, and from Medtronic Global Holdings SCA, which is the new post-close borrowing entity."
Standard & Poor’s cut its rating on Medtronic from A to AA- and put a stable outlook on the debt. But S&P also lowered its commercial paper rating to A-1 from A-1+.
"The downgrade reflects our view that the incremental strengthening of the business risk from the acquisition of Covidien is more than offset by the considerable increase in debt leverage," Standard & Poor’s credit analyst David Kaplan said in prepared remarks.
Fitch said it downgraded Covidien’s issuer default rating to A- from A and assigned a negative rating outlook to the debt.