Fitch Rates Bausch Health Companies Inc.'s Sr. Unsecured Notes Offering 'B'/'RR4'; Outlook Stable

(The following statement was released by the rating agency) Fitch Ratings-Chicago-18 November 2020: Fitch Ratings has assigned a 'B/RR4' rating to Bausch Health Companies Inc.'s senior unsecured notes offering. The net proceeds from the issuance will be used to refinance the company's existing euro-denominated unsecured notes due 2023. The ratings apply to approximately $24.6 billion of debt outstanding at Sept. 30, 2020. The Rating Outlook is Stable. A full list of ratings follows at the end of this release. Key Rating Drivers Coronavirus Headwinds: The coronavirus pandemic has adversely affected Bausch's operating performance during 2020. The company's Ortho Dermatologics, Dentistry and Global Surgical businesses, which account for roughly 13% of revenues have been hit the hardest. The operating stress will likely cause gross leverage (total debt/EBITDA) to remain above the 7.0 times (x) level during the near term, which Fitch views to be consistent with the 'B' issuer default rating (IDR). However, Fitch expects that BHC will continue to generate significantly positive FCF and maintain adequate liquidity. Operations should improve in 2021 to pre-coronavirus pandemic levels helping to reduce leverage to below 7.0x. Bausch Spinoff Strategically Constructive: We view Bausch's eye care business planned spinoff as strategically sound, given limited synergies between the branded pharma business and eye care. The proposed transaction's effect on Bausch's credit profile will largely depend on the capital structure and financial strategy post spin. The company is working toward a post-spin leverage profile of the eye care business and the legacy business of roughly 4.0x and 5.5x, respectively. Even though Bausch's business risk profile will be negatively affected by less diversification, greater focus on innovative pharma should improve the company's R&D pipeline's probability of success. The Bausch + Lomb, which consists mostly of eye care, generated $3.7 billion or 43% of Bausch's $8.6 billion of revenue in 2019. The company intends to focus on expanding its leadership in its gastroenterology, aesthetics/dermatology, neurology and international business. Good Progress in Business Turn-around: Bausch Health's 'B' issuer default rating (IDR) reflects progress in stabilizing operations and reducing debt since mid-2016 through the first two months of 2020. Throughout the business turn-around, BHC consistently generated strong FCF relative to the 'B' category rating, pushed its nearest large debt maturity out until 2023, and loosened restrictive secured debt covenants through refinancing transactions. The company's stronger operating profile and consistent cash generation should enable it to further reduce leverage in the near term once the headwinds caused by the pandemic have abated. High Leverage: The negative impact of the coronavirus pandemic has stressed leverage (total debt/EBITDA) during 2020, but Fitch expects the company to reduce leverage to 7.0 times or below in 2021, and even further during the intermediate term. Bausch has made good progress in reducing the absolute level of debt outstanding by approximately $6.2 billion since March 31, 2016 with a combination of internally generated cash flow and proceeds from asset divestitures. Intermediate-Term Growth Potential: Bausch Health operates with a reasonably diverse business model relative to its products, customers and geographies served. Many of the company's businesses comprise defensible product portfolios, which are capable of generating durable margins and cash flows. Post the spinoff of the eye health business, Fitch believes that the expected long-term growth of the gastrointestinal (GI/Salix) businesses support the company's operating prospects. Fitch also expects that the dermatology business will grow in 2021 as BHC successfully commercializes recently launched products. Reliance on New Products: The stabilization of Bausch Health's operating profile has involved an increased focus on developing an internal research and development pipeline, which Fitch believes is constructive for the company's credit profile over the long term. This strategy is not without risk since Bausch Health needs to ramp up the utilization of recently approved products through successful commercialization efforts. These products include Siliq (for the treatment of moderate-to-severe plaque psoriasis, although with safety restrictions), Bryhali (plaque psoriasis), Lumify (red eye) and Vyzulta (glaucoma). The recent approval of Duobrii or IDP-118 (plaque psoriasis) should also help to strengthen the company's dermatology business. In addition, the company recently launched Infuse, its daily silicon hydrogel contact lenses. Near-Term Maturities Manageable: Bausch Health consistently generates significant positive FCF (LTM FCF margin of 8.0%), and the current refinancing will satisfy debt maturities until 2023. Annual amortization requirements on the term loans of about $263 million annually start in 2023. The company has adequate access the credit markets providing the flexibility to further refinance upcoming maturities. Bausch Health Companies Inc.: 4; Exposure to Social Impacts: 4 Bausch Health Companies Inc. has an ESG Relevance Score of 4 for Exposure to Social Impacts due to pressure to contain healthcare spending growth; highly sensitive political environment, and social pressure to contain costs or restrict pricing which has a negative impact on the credit profile, and is relevant to the rating in conjunction with other factors. Except for the matters discussed above, the highest level of ESG credit relevance, if present, is a score of 3 - ESG issues are credit neutral or have only a minimal credit impact on the entity(ies), either due to their nature or the way in which they are being managed by the entity(ies). For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg. Derivation Summary Bausch Health, rated 'B'/Stable, is significantly larger and more diversified than specialty pharmaceutical industry peers Mallinckrodt (NYSE:MNK) plc ('d*') and Endo International plc ('ccc+*'/Outlook Negative). While all three manufacture and market specialty pharmaceuticals and have maturing pharmaceutical products, Bausch Health's Bausch + Lomb (B+L) business meaningfully decreases business concentration risk relative to Mallinckrodt and Endo. B+L offers operational diversification in terms of geographies and payers. Many of its products are purchased directly by customers without the requirement of a prescription. Bausch Health's rating also reflects gross debt leverage that is higher than peers. But unlike its peers, BHC does not face contingent liabilities related to the opioid epidemic. Bausch accumulated a significant amount of debt through numerous acquisitions. In addition, Bausch Health had a number of missteps in the integration process and other operational issues. Management has been focusing on reducing leverage by applying operating cash flow and divestiture proceeds to debt reduction and returning the business to organic growth through internal product development efforts. Key Assumptions Fitch's Key Assumptions Within Its Rating Case for the Issuer - High single-digit to low double-digit percentage revenue contraction in 2020 due to effects of the coronavirus pandemic on operations and returning to growth over 2019 levels in 2021. Fitch expects particular weakness in Global Surgical, Medical Dermatology and Dentistry in 2020; - EBITDA of $3 billion-$3.2 billion in 2020 and increasing thereafter, driven by a return to a more normalized healthcare operating environment, revenue growth, improved sales mix and cost control; - Negative FCF in 2020 due to the $1.38 billion litigation payment and then normalized to at least $1.3 billion of FCF generated annually; - Continued debt reduction utilizing FCF; - Leverage declining to below 7.0x by the end of 2021. RATING SENSITIVITIES Factors that could, individually or collectively, lead to positive rating action/upgrade: -- An expectation of gross debt leverage (total debt/EBITDA) durably below 6.0x; -- Bausch Health continues to maintain a stable operating profile and refrains from pursuing large, leveraging transactions including acquisitions; -- Forecasted FCF remains significantly positive; Factors that could, individually or collectively, lead to negative rating action/downgrade: -Gross debt leverage (total debt/EBITDA) durably above 7.0x; - FCF significantly and durably deteriorates; - Refinancing risk increases and the prospect for meaningful leverage reduction weakens. Best/Worst Case Rating Scenario International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579. Liquidity and Debt Structure Bausch Health had adequate near-term liquidity at Sept. 30, 2020, including restricted and unrestricted cash on hand of $1.99 billion. The company will use $1.21 billion of the cash to fund pending settlement of the U.S. Securities litigation due in 2020. The company had full availability (excluding letters of credit) under its $1.225 billion revolving credit facility that matures in 2023. The company's most recent refinancing activities have satisfied debt maturities through 2022. Bausch Health consistently generated significantly positive FCF during 2015-2019, despite facing serious operating challenges. Fitch expects the company to maintain adequate headroom under the debt agreement financial maintenance covenants during the 2020-2023 forecast period. Recovery Assumptions The recovery analysis assumes that Bausch Health would be considered a going concern in bankruptcy and that the company would be reorganized rather than liquidated. Fitch estimates a going concern enterprise value (EV) of $19.7 billion for Bausch Health and assumes that administrative claims consume 10% of this value in the recovery analysis. The going concern EV is based upon estimates of post-reorganization EBITDA and the assignment of an EBITDA multiple. Fitch's estimate of Bausch Health's going concern EBITDA of $2.63 billion is 25% lower than the LTM 2019 EBITDA, reflecting a scenario where the recent stabilization in the base business is reversed, and the company is not successful in commercializing the R&D pipeline. Fitch assumes Bausch Health will receive a going concern recovery multiple of 7.5x EBITDA. This is slightly higher than the 6.0x-7.0x Fitch typically assigns to specialty pharmaceutical manufacturers, representing Bausch + Lomb's relatively more durable consumer products focus and the company's larger scale and broader product portfolio than peers. The current average forward public market trading multiple of Bausch Health and the company's closet peers is 9.9x. Fitch applies a waterfall analysis to the going concern EV based on the relative claims of the debt in the capital structure, and assumes that the company would fully draw the revolvers in a bankruptcy scenario. The senior secured credit facility, including the term loans and revolver, and senior secured notes ($10.1 billion in the aggregate), have outstanding recovery prospects in a reorganization scenario and are rated 'BB/RR1', three notches above the IDR. The senior unsecured notes ($15.65 billion in the aggregate) have an average recovery and are rated 'B/RR4'. Date of Relevant Committee 07 May 2020 REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING The principal sources of information used in the analysis are described in the Applicable Criteria. ESG Considerations Bausch Health Companies Inc.: Exposure to Social Impacts: 4 Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg Bausch Health Companies Inc. ----senior unsecured; Long Term Rating; New Rating; B Contacts: Primary Rating Analyst Robert Kirby, CFA Director +1 312 368 3147 Fitch Ratings, Inc. One North Wacker Drive Chicago, IL 60606 Secondary Rating Analyst Megan Neuburger, CFA Managing Director +1 212 908 0501 Committee Chairperson John Culver, CFA Senior Director +1 312 368 3216 Media Relations: Elizabeth Fogerty, New York, Tel: +1 212 908 0526, Email: elizabeth.fogerty@thefitchgroup.com Additional information is available on www.fitchratings.com Applicable Model Numbers in parentheses accompanying applicable model(s) contain hyperlinks to criteria providing description of model(s). 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