GlaxoSmithKline Finance Plc — Moody’s affirms GSK’s A2 long-term senior unsecured ratings; maintains negative outlook

Rating Action: Moody’s affirms GSK’s A2 long-term senior unsecured ratings; maintains negative outlookGlobal Credit Research – 15 Feb 2021Affirms P-1 short-term commercial paper ratingsLondon, 15 February 2021 — Moody’s Investors Service (Moody’s) has today affirmed GlaxoSmithKline plc’s (‘GSK’) ratings and its financing subsidiaries’ A2 long-term senior unsecured ratings and P-1 short-term commercial paper ratings. The outlook remains negative.A full list of affected ratings can be found at the end of this press release.RATINGS RATIONALE »Today’s affirmation reflects the large size and leading positions that GSK will retain following the separation of its Consumer Healthcare segment in 2022 as well as our view that the group’s diversity, albeit reduced, will remain high and supported by low concentration on top products » says Frederic Duranson, a Moody’s Assistant Vice President and lead analyst for GSK. « While we expect that a dividend cut will absorb the lost free cash flow initially, the negative outlook continues to reflect a degree of uncertainty on the extent of deleveraging » Mr Duranson adds.The future separation of Consumer Healthcare (GBP10 billion revenues and GBP2.2 billion operating profit in 2020) will meaningfully reduce the group’s size and diversity. The remaining more R&D-intensive and more volatile Pharmaceuticals and Vaccines segments have a higher business risk profile. However, GSK will remain one of the most diversified pharmaceuticals companies globally with leading positions in areas such as HIV and vaccines. Its three largest products will continue to account for less than 30% of revenues and its exposure to patent expiries will stay relatively low. Recent product launches will support the revenue base but the group’s pipeline continues to require strengthening if it is to improve growth prospects and there is still high execution risk on the late stage pipeline.Moody’s estimates that the separation of Consumer Healthcare will lead to a loss in annual free cash flow (after minority dividends to Pfizer Inc., A2 stable) between GBP1.0 billion and GBP1.5 billion. Nevertheless, GSK has communicated during its 2020 annual results that it will reset its dividend distributions from 2022. While the future level of distributions remains unknown, the rating agency currently expects that the dividend reduction will at least compensate the free cash flow shortfall.GSK has maintained credit metrics outside the requirements for an A2 rating for several years. Moody’s expects modest deleveraging in 2021 (from an estimated 3.5x at the end of 2020) on the back of debt repayments despite a low-single-digit decline in EBITDA. As Pharmaceuticals and Vaccines revenues return to growth in 2022, fueled by recent product launches and no major disruptions to vaccinations, while growth in R&D abates, adjusted leverage will reduce towards 3.0x in 2022.However, there remains a degree of uncertainty on the level of deleveraging the group will achieve after the separation of Consumer Healthcare in 2022. Moody’s expects that:- the Consumer Healthcare entity will raise debt in line with its target net leverage range of 3.5x to 4.0x- GSK will receive a dividend of around GBP8 billion, proportional to its 68% stake in the JV with Pfizer- the majority of this cash will be used to reduce balance sheet debt to around GBP20 billion while GSK will lose annual EBITDA in the range of GBP2.6 billion to GBP2.8 billion (which is fully consolidated in its financial statements at the moment).As a result, on a Moody’s adjusted basis, the rating agency currently does not expect that the separation will be a materially deleveraging event.Governance considerations will influence the future trajectory of the A2 rating. While the above assumptions would not lead to any material deleveraging from the separation, Moody’s expects that GSK will provide clarity later this year on (i) the level of future dividends, (ii) the mechanics of the Consumer Healthcare separation and (iii) the magnitude of debt repayments and deleveraging. In parallel, the group’s focus on strengthening its pipeline raises acquisition risk. The group’s large portfolio of established medicines and vaccines offers divestment opportunities which would support acquisition funding but this would likely lead to a net reduction in cash generation.The A2 rating also incorporates social considerations including risks related to potential US drug pricing reforms and product safety litigation. However these risks are mitigated by GSK’s good geographic and payor diversity, as well as HIV’s current status as a protected class in Medicare part D plans. In addition, the group’s efforts to develop a COVID-19 vaccine could bring social benefits stemming from improved relations and reputation with key stakeholders such as governments, regulators, patients and healthcare professionals. GSK’s commitment not to profit from any vaccine during the pandemic phase limits the EBITDA and cash flow upside.LIQUIDITYGSK’s liquidity is excellent. As of 31 December 2020, the company had a cash balance of GBP6.3 billion. The group also has access to GBP1.9 billion of bilateral bank facilities, $2.5 billion in 364-day committed facilities (both undrawn) as well as $10 billion and GBP5 billion commercial paper programmes. The group has one bond due in May 2021 ($750 million) and two in September 2021 (totaling E2 billion).RATING OUTLOOKThe negative outlook primarily reflects Moody’s expectation that GSK’s credit metrics will remain weak for the rating category prior to the separation of Consumer Healthcare as well as uncertainty around the magnitude of deleveraging that GSK’s creditors should expect upon the de-merger, including GSK’s ability and willingness to maintain Moody’s-adjusted leverage in line with the requirements for an A2 rating.FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGSUpward pressure on the rating is unlikely in the short term given the negative outlook.The outlook could be stabilised if GSK’s credit metrics strengthen from their current levels, including Moody’s-adjusted debt/EBITDA moving sustainably below 3.0x and Moody’s-adjusted cash flow from operations (CFO)/debt improving toward and remaining in the high 20s in percentage terms.Over time, upward pressure on the A2 rating could develop if (1) CFO/debt improves toward 40% on a sustained basis and (2) Moody’s-adjusted debt/EBITDA decreases below 2.5x on a sustained basis.GSK’s ratings could be downgraded if (1) GSK’s adjusted debt/EBITDA ratio failed to reduce from the current level and remained sustainably above 3.0x, or (2) adjusted CFO/debt remained below the high 20s in percentage terms, or (3) GSK embarked upon larger acquisitions.PRINCIPAL METHODOLOGYThe principal methodology used in these ratings was Pharmaceutical Industry published in June 2017 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1062755. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.LIST OF AFFECTED RATINGS:Affirmations:..Issuer: GlaxoSmithKline Capital Inc…..Backed Senior Unsecured Regular Bond/Debenture, Affirmed A2….Backed Senior Unsecured Shelf, Affirmed (P)A2..Issuer: GlaxoSmithKline Capital Plc….Backed Senior Unsecured Medium-Term Note Program, Affirmed (P)A2….Backed Other Short Term, Affirmed (P)P-1….Backed Senior Unsecured Regular Bond/Debenture, Affirmed A2….Backed Senior Unsecured Shelf, Affirmed (P)A2..Issuer: GlaxoSmithKline Finance Plc….Backed Commercial Paper, Affirmed P-1..Issuer: GlaxoSmithKline LLC….Backed Commercial Paper, Affirmed P-1..Issuer: GlaxoSmithKline plc….LT Issuer Rating, Affirmed A2….Senior Unsecured Medium-Term Note Program, Affirmed (P)A2….Other Short Term, Affirmed (P)P-1….Senior Unsecured Shelf, Affirmed (P)A2..Issuer: GSK Capital K.K…..Backed Senior Unsecured Medium-Term Note Program, Affirmed (P)A2….Backed Other Short Term, Affirmed (P)P-1..Issuer: GSK Finance (No.3) plc….Backed Senior Unsecured Regular Bond/Debenture, Affirmed A2Outlook Actions:..Issuer: GlaxoSmithKline Capital Inc…..Outlook, Remains Negative..Issuer: GlaxoSmithKline Capital Plc ….Outlook, Remains Negative ..Issuer: GlaxoSmithKline plc ….Outlook, Remains Negative ..Issuer: GSK Capital K.K. ….Outlook, Remains Negative ..Issuer: GSK Finance (No.3) plc….Outlook, Remains Negative..Issuer: GlaxoSmithKline Finance Plc ….Outlook, No Outlook ..Issuer: GlaxoSmithKline LLC ….Outlook, No Outlook CORPORATE PROFILE GSK is a leading global pharmaceuticals company operating in diversified therapeutic areas across Pharmaceuticals, Vaccines and Consumer Healthcare. GSK’s main pharmaceutical franchises are HIV and Respiratory which comprise both innovative and legacy medicines. In August 2019, GSK completed the merger of its consumer health unit with that of Pfizer, with the intention to separate it around three years after closing. GSK generated revenue of GBP34 billion and core operating profit of GBP9 billion in 2020.REGULATORY DISCLOSURESFor further specification of Moody’s key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody’s Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody’s rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider’s credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.These ratings are solicited. Please refer to Moody’s Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.Moody’s general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1243406.The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody’s affiliates outside the EU and is endorsed by Moody’s Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. 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