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Walgreens Boots Alliance, Inc. -- Moody's changes Walgreens outlook to negative; affirms ratings

Rating Action: Moody's changes Walgreens outlook to negative; affirms ratings

Global Credit Research - 07 Aug 2020

New York, August 07, 2020 -- Moody's Investors Service, ("Moody's") today changed the outlook of Walgreens Boots Alliance, Inc. ("WBA") and its subsidiary Walgreen Co. to negative and affirmed their Baa2 senior unsecured rating. Moody's also affirmed Walgreens Boots Alliance's P-2 commercial paper rating.

"The disruption caused by the coronavirus pandemic has taken a further toll on Walgreen's already weaker than expected operating performance", Moody's Vice President Mickey Chadha stated. "Lower customer traffic, a shift in sales mix to lower margin consumables, store closures in the UK, an increase in lower margin e-commerce sales and lower prescription growth due to deferrals in routine physician visits are among the myriad of pandemic related issues causing operating profits to drop significantly and credit metrics to weaken significantly", Chadha further stated.

The rapid spread of the coronavirus outbreak, deteriorating global economic outlook, low oil prices, and high asset price volatility have created an unprecedented credit shock across a range of sectors and regions. We regard the coronavirus outbreak as a social risk under our ESG framework, given the substantial implications for public health and safety. Today's action reflects the impact on Walgreens of the deterioration in credit quality it has triggered, given its exposure to lower foot traffic, sales mix and script volume, which has left it vulnerable to shifts in market demand and sentiment in these unprecedented operating conditions.

Affirmations: ..Issuer: Walgreen Co.

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

..Issuer: Walgreens Boots Alliance, Inc.

....Senior Unsecured Commercial Paper, Affirmed P-2

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

....Senior Unsecured Shelf, Affirmed (P)Baa2

Outlook Actions:

..Issuer: Walgreen Co.

....Outlook, Changed To Negative From Stable

..Issuer: Walgreens Boots Alliance, Inc.

....Outlook, Changed To Negative From Stable

RATINGS RATIONALE

Walgreens Baa2 senior unsecured rating reflects its large scale and the strong market positions of its three divisions; retail pharmacy USA, retail pharmacy international, and pharmaceutical wholesale. However, the negative pressures related to the coronavirus pandemic have exacerbated the already weaker than expected operating performance of the company. The recent weak operating results have caused leverage and coverage to weaken to 4.4x and 3.1x respectively for the LTM period ending May 31, 2020. Moody's expects the underlying pressures causing the deterioration in the company's operating income to only improve modestly in the fiscal fourth quarter. These include lower margins due to a shift in sales mix, lower store traffic, and deferrals in non-essential doctor visits. Therefore, leverage is expected to deteriorate further to over 4.5x at the end of the current fiscal year ending August 31st. However, the Baa2 rating is predicated on Moody's expectation that the weakness in Walgreens credit metrics is temporary and that Walgreens will proactively repay debt in order to improve its leverage and coverage. Walgreens is in the second year of its business transformation plan to enhance its customer value proposition in areas such as digitalization, personalization and inventory rationalization and the company expects about $2 billion in annual cost savings by fiscal 2022. The company's purchasing contract with AmerisourceBergen, its contract with the Department of Defense Tricare program and its joint venture with Prime Therapeutics, and cost cuts combined with closure of unprofitable stores should help Walgreens offset some of the pressures on profitability. Moody's expects purchasing patterns to gradually normalize next year as local economies start reopening and traffic in the stores improves. Walgreens' has also formed partnerships and collaborations with entities like Kroger which are in the early stages of development. More recently Walgreens announced a plan to open 500 to 700 VillageMD clinics in its stores over the next five years. If successful this will provide a lift in script volume.

Governance is also a key risk factor as the company's financial strategies with respect to acquisitions and share repurchases have been detrimental to debt holders. The company has currently suspended share repurchases and Moody's expects share repurchases to remain suspended at least until the company improves credit metrics to levels commensurate with its Baa2 rating. Moody's expects the company to prioritize debt reduction over shareholder returns and lower its debt burden in the next couple of years to be more in line with lower profitability levels. Debt reduction combined with improvement in EBITDA is expected to improve debt/EBITDA below 3.75x in the next 18-24 months.

The company's liquidity remains good with strong free cash flow generation and ample availability under its credit facilities which include a $3.5 billion revolver maturing August 2023 and over $8 billion in short term bank facilities. The rating also indicates Moody's favorable view of the drugstore industry which benefits from the aging of the U.S., U.K., and European populations which will likely increase long term use of prescription drugs. Moody's also believes demand for prescription drug medication is mostly resilient to recessionary pressures.

The negative outlook reflects the uncertainty surrounding the success of the company's profit enhancing initiatives amid the dislocation caused by the pandemic and in an increasingly competitive drug retailing environment which was already under margin pressure prior to the pandemic.

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

Ratings could be downgraded if the company does not prioritize debt reduction over shareholder friendly transactions including share repurchases at least until debt/EBITDA improves to below 3.75x. Ratings could also be downgraded if operating performance does not improve or if debt levels remain elevated such that Debt/EBITDA does not demonstrate meaningful improvement towards 3.75x in the next 12-18 months or if Debt/EBITDA remains above 3.75x in the next 18-24 months, or if EBITA to interest expense remains below 4.75x in the next 18-24 months, or if liquidity deteriorates.

Ratings could be upgraded if Debt to EBITDA falls to 3.25x or below, EBITA to interest expense remains above 5.5x and company maintains a financial policy that supports maintaining credit metrics at these levels.

Walgreens Boots Alliance, Inc. is a global retail pharmacy and global pharmaceutical wholesaler. WBA together with the companies in which it has equity method investments operates over 18,750 stores in 11 countries and over 400 distribution centers delivering in 20 countries (including equity method investments). LTM May 31, 2020 revenues are over $138.7 billion.

The principal methodology used in these ratings was Retail Industry published in May 2018 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1120379. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

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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