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CVS Health -- Moody's changes CVS Health's outlook to stable; affirms Baa2 rating

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Rating Action: Moody's changes CVS Health's outlook to stable; affirms Baa2 rating

Global Credit Research - 04 Dec 2020

New York, December 04, 2020 -- Moody's Investors Service, ("Moody's") today changed the outlook for CVS Health (CVS) to stable from negative and affirmed the company's senior unsecured rating at Baa2. Moody's also affirmed the company's P-2 short term commercial paper rating.

The change in outlook to stable reflects governance considerations particularly CVS' financial strategies which continue to support significant debt reduction from its excess cash flow and an ongoing commitment to its internal leverage target of low 3.0x. Since the closing of the Aetna transaction, CVS has repaid $13.8 billion of debt and Moody's expects it to repay in excess of $5 billion of debt over the next twelve months.

"CVS continues to prioritize debt reduction since its acquisition of Aetna with no share repurchases or increases in dividends and we expect this trend to continue thereby improving credit metrics further towards its internal leverage target of low 3x's by 2022, hence the stable outlook", Moody's Vice President Mickey Chadha stated. "Despite headwinds due to the coronavirus pandemic CVS's cash flow generation has been robust and the company's scale and diversified revenue base will be a competitive advantage going forward", Chadha further stated.

Affirmations:

..Issuer: CVS Health

.... Commercial Paper, Affirmed P-2

....Senior Unsecured Regular Bond/Debenture, Affirmed Baa2

Outlook Actions:

..Issuer: CVS Health

....Outlook, Changed To Stable From Negative

RATINGS RATIONALE

CVS Health's Baa2 senior unsecured rating is supported by its strong qualitative factors including its strong market position given its very large scale and broad industry reach and the solid fundamentals of its industry sector. Governance is also a key rating consideration particularly its prudent financial strategies as reflected by CVS' excellent liquidity and continued commitment to debt reduction. CVS has repaid approximately $13.8 billion in debt since the closing of the transaction using its robust free cash flow and has suspended share repurchases as well as increases in dividends since the Aetna transaction. However, leverage will remain high for the rating level until the end of 2022. Moody's estimates that lease-adjusted debt/EBITDA will be about 4.0x at the end of fiscal 2020 improving to about 3.5x by the end of 2022. Proforma leverage was about 4.6x at the closing of the Aetna acquisition. CVS' operating results in 2020 have been strong despite coronavirus related costs with the company raising its profit expectations for the year as weakness in its retail segment earlier in the year was more than offset by strength in its healthcare benefits segment as utilization rates were low primarily due to deferrals of elective procedures and membership growth in government products like Medicare and Medicare. CVS pharmacies were deemed essential and all its stores remained open while many non-essential retailers temporarily shuttered their stores. Moody's continues to expect synergies to be in the $900 million range on a run rate basis and the company has a very good track record of achieving synergies in its previous acquisitions of Caremark and Omnicare. The combination of Aetna and CVS created the potential to reshape the entire health plan market although execution risk remains high with the combination. Both the retail pharmacy and PBM industries will benefit from broad demographic trends that will continue to drive increases in the use of prescription drugs over the longer term. However, increased competition, reimbursement rate pressure, regulatory and political uncertainty especially pertaining to drug pricing, remain key risks to the downside.

The stable outlook reflects Moody's expectation that debt reduction will remain the top priority for the company in its capital allocation and that metrics will continue to improve towards the company's leverage target of low 3x's by 2022. The stable outlook also recognizes the company's strong business profile given its market position, large scale and its diverse revenue streams as the only company in the healthcare sector with a large retail pharmacy operation, one of the largest pharmacy benefit managers and health insurance company.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

Ratings could be downgraded if the execution of its management plan to further improve operating performance falters, or financial policy shifts in terms of share repurchases or mergers and acquisitions or if improving trends in operating performance do not continue such that debt/EBITDA and EBITA/interest do not demonstrate sustained improvement towards below 3.75 times and above 5.0 times respectively in the next 12 to 18 months.

Ratings could be upgraded if operating results continue to improve such that debt/EBITDA improves to below 3.25 times on a sustained basis and EBITA/interest expense is sustained above 6.0 times while financial policy supports credit metrics remaining at these levels.

CVS Health, headquartered in Woonsocket, Rhode Island, fills or manages more than 1 billion prescriptions annually. It operates more than 9,900 retail pharmacies in the US and Puerto Rico. In addition, it has a pharmacy benefits management operation with approximately 103 million plan members, and its health insurance business serves an estimated 33 million people. CVS also operates a mail order and specialty pharmacy division, an on-line pharmacy, approximately 1,100 walk in clinics, and a dedicated senior pharmacy care business. Annual revenues are over $250 billion.

The principal methodology used in these ratings was Business and Consumer Service Industry published in October 2016 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1037985 Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

The principal methodology used in these ratings was changed to the Business and Consumer Service Industry methodology from the Retail Industry methodology as this methodology is better aligned with the strategic direction of the company.

REGULATORY DISCLOSURES

For 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_1133569.

At least one ESG consideration was material to the credit rating action(s) announced and described above.

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. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Manoj Chadha VP - Senior Credit Officer Corporate Finance Group Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 Margaret Taylor Associate Managing Director Corporate Finance Group JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 Releasing Office: Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653

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