Debt Issuance And M&A Notwithstanding, Outlook For U.S.

Consumer, Retail, And Health Care Sectors Is Stable

Primary Credit Analysts: Michael F Scerbo, New York (1) 212-438-7858; michael.scerbo@standardandpoors.com Linda I Phelps, New York (1) 212-438-3059; linda.phelps@standardandpoors.com

Table Of Contents
Issuance Proceeds To Refinance Debt, Invest In Growth Mostly Stable Outlooks Consumer Products Forecast: General Financial Stability Despite Meaningful Debt Issuance Retail And Restaurant Forecast: General Financial Stability Despite Some Uneven Performances And A Still Cautious Consumer Health Care Forecast: General Financial Stability, But Some Erosion Could Stem From The Affordable Care Act Related Criteria And Research

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Debt Issuance And M&A Notwithstanding, Outlook For U.S. Consumer, Retail, And Health Care Sectors Is Stable
Despite years of substantial debt issuance and large mergers and acquisitions (M&A), U.S. consumer products, retail, and health care (CRH) companies, in general, appear to be in relatively good financial shape. Although debt issuance is likely to carry on in these sectors through at least 2014, Standard & Poor's Ratings Services expects EBITDA growth to generally keep pace, and that companies will deploy the vast majority of the funds from the new debt to refinance existing debt or support growth initiatives. This should translate into a generally stable rating environment for these sectors. Overview Across the U.S. consumer products, retail, and health care (CRH) sectors, we assess the ratings outlook to be stable for about 87% of the rated companies. CRH issuers are likely to continue to opportunistically refinance debt while interest rates remain low, and to deploy new debt to support growth through investments in their business. For the consumer products, retail, and restaurant sectors, we expect credit metrics to remain relatively stable as EBITDA growth keeps pace with increased debt. Though financial profiles will remain generally stable for the vast majority of the health care sector, continued leveraged M&A activity and revenue pressure combined with the limits of continued cost cutting could create some erosion.

As the U.S. economic recovery gains momentum, rated CRH companies are likely to take continued advantage of low interest rates and the generally favorable capital markets environment. Debt issuance, according to our framework for forecasting global debt demand, could be as follows: Projected Debt Demand 2013-2014
For 2013-2014 New Debt Demand 2012 Total Debt Consumer Retail Health care Total CRH $405 bil. $278 bil. $469 bil. $1,152 bil. Refinancing Demand* $116 bil. $79 bil. $134 bil. $329 bil. Nominal GDP 5.1% 5.1% 5.1% -1x Nominal GDP Growth $42 bil. $29 bil. $49 bil. $120 bil. 1.2x Nominal GDP Growth $51 bil. $35 bil. $59 bil. $145 bil. Total Debt Issuance 1x Nominal GDP Growth $158 bil. $109 bil. $183 bil. $450 bil. 1.2x Nominal GDP Growth $167 bil. $115 bil. $193 bil. $475 bil.

*Estimated refinancing for debt maturities and opportunistic transactions in advance of maturities; calculated on a pro rata basis over an average seven-year period. So for two years, it is 2/7. Based on International Monetary Fund April 2013 projections.

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Debt Issuance And M&A Notwithstanding, Outlook For U.S. Consumer, Retail, And Health Care Sectors Is Stable

Issuance Proceeds To Refinance Debt, Invest In Growth

Recent refinancing has reduced CRH debt maturities for 2013 and 2014, but issuers are likely to continue to opportunistically refinance debt while interest rates remain low, particularly in anticipation of a gradual increase in rates. Issuers are also likely to deploy new debt to support growth through investments in their business. While we believe there was some underinvestment in many U.S. corporates during 2009 to 2011, we do not believe it has been as significant for companies operating within the consumer product, retail, and health care sectors; particularly as these businesses are generally not capital-intensive and many have transitioned to global sourcing and contract manufacturing models. In addition, issuers are likely to use new debt to fund M&A. We believe M&A activity will remain significant in health care and some consumer product subsectors, and more moderate for the retail sector. While we believe most will maintain current financial policies and fund shareholder distributions with cash resources, we believe there could be a modest amount of "leakage", in the form of debt-funded shareholder distributions--especially for financial sponsor-owned companies.

Mostly Stable Outlooks

Across the CRH sectors, we assess the ratings outlook to be stable for about 87% of the rated companies. We believe debt-to-EBITDA leverage for all three sectors will remain relatively steady as earnings from organic and acquired growth keep pace with new debt issuance, and interest coverage metrics will remain stable to slightly better as companies refinance at lower rates. Liquidity for most companies should remain adequate as companies gain more surplus cash on their balance sheet, extended debt maturity schedules, and more reduced covenant credit facilities. However, we could see modest weakening of financial profiles for some health care companies, in part due to hurdles created by health care reform. However, there are several risks to our forecast. Companies could pursue more aggressive (shareholder-friendly) financial policies or over-expand and/or overpay for acquisitions. This could jeopardize their credit measures and, in turn, how we rate them. Similarly, if market conditions deteriorate and interest rates rise more precipitously than we anticipate, we would expect debt issuance to moderate, or coverage metrics could weaken, particularly for companies with significant unhedged floating rate debt.

Consumer Products Forecast: General Financial Stability Despite Meaningful Debt Issuance
The consumer products sector saw issuance of about $95 billion to $100 billion annually for 2012 and 2011, roughly double the level of issuance during the recent recession. Debt issuance during the first half of 2013 is on track to surpass 2012 issuance, due in part to refinancing and large M&A transactions. Though we expect rated consumer products companies to use the bulk of the proceeds to refinance existing debt, they will also likely raise new debt to

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Debt Issuance And M&A Notwithstanding, Outlook For U.S. Consumer, Retail, And Health Care Sectors Is Stable

support growth and--to a lesser extent--fund shareholder distributions. With the cost of borrowing remaining low, we expect M&A activity to remain similar to the moderate 2012 levels, with significant deal volume in the food and beverage subsectors, which have been consistently merging and acquiring. Large recent transactions include the February 2013 Heinz leveraged buyout (by Berkshire/3G), Hormels purchase of Skippy from Unilever, and the proposed purchase of Hostess' assets by both strategic and financial buyers. The agribusiness sector has also been active lately, as demonstrated by Smithfield's May announcement that it would be acquired by a Chinese buyer. And bolt-on acquisitions will probably continue--especially involving emerging markets, where many companies are seeking growth outside of slower growth developed markets. We also expect companies to continue to support growth with investment in their brands as well as some capital expenditure needs. While there was a pull back on investment during the last recession, we do not believe there has been material underinvestment in the sector. Overall, we expect shareholder distribution activity to be leverage-neutral for the consumer products sector and substantially funded with cash sources. But we have seen some increase in leveraged shareholder distributions by speculative-grade, sponsor-owned firms.

Financial risk profiles to remain generally stable

For the consumer products sector as a whole, we expect credit metrics to remain relatively stable, with EBITDA growth to keep pace with increased debt levels. While we estimate leverage has increased modestly for the sector (roughly 0.5x since 2010), we expect adjusted debt-to-EBITDA leverage for most issuers in the sector to remain at current levels, averaging in the mid- to high-2x area (weighted average) and with median leverage in the low-4x area. We currently assess liquidity to be adequate or better for roughly 93% of the rated consumer products companies. But liquidity could strengthen slightly with more surplus cash on the balance sheet, extended debt maturity schedules, and refinanced credit facilities with fewer maintenance covenants.

Retail And Restaurant Forecast: General Financial Stability Despite Some Uneven Performances And A Still Cautious Consumer
We expect debt issuance for 2013 and 2014 to continue to be steady, but slightly below the over $65 billion level annually for the past three years (roughly three times the average issuance during the 2008-2009 recessionary period). Debt issuance for the first half of 2013 for rated retailers and restaurants is tracking to be modestly lower than 2012 issuance. We expect companies to use the vast majority of the proceeds from debt issuance to refinance existing debt and fund shareholder distributions. We also expect retail and restaurant companies to use some debt to support capital expenditures and larger M&A activities. We believe certain subsegments will borrow to invest in stores and infrastructure, including e-commerce and omni-channel capabilities. Still, we do not believe there is significant catch-up investment needed in the sector's store footprint stemming from the last recession. We estimate strategic M&A activity for 2013 to be somewhat light and similar to 2012. Announced deals so far in 2013 includes the large merger of office superstores Office Depot and OfficeMax (an all-stock transaction), Kroger's $2.5

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Debt Issuance And M&A Notwithstanding, Outlook For U.S. Consumer, Retail, And Health Care Sectors Is Stable

billion acquisition of a regional supermarket chain, as well as a realignment of ownership in the supermarket segment (akin to a series of divestitures), including Safeway's sale of its Canadian operations. In most markets, we think there is an oversupply of retail space. While in many industries oversupply can spur M&A in the right economic climate, in retail, consolidation is often expensive and slow given the extensive use of leases in the sector. We expect activity by private-equity-owned companies to remain steady as a number of private-equity-owned companies have increased leverage through either a dividend or sale to another sponsor.

Financial risk profiles to remain generally stable

For the retail and restaurant sector as a whole, we expect credit metrics to remain relatively stable as EBITDA growth keeps pace with increased debt. We expect adjusted debt-to-EBITDA leverage for most issuers in the sector to remain at current levels, which average in the mid- to high-2x area (weighted average) and with median leverage in the mid-4x area. We assess liquidity to be adequate or better for roughly 96% of the rated retail companies, but believe liquidity could strengthen slightly with more surplus cash on the balance sheet, extended debt maturity schedules, and refinanced credit facilities with fewer maintenance covenants.

Health Care Forecast: General Financial Stability, But Some Erosion Could Stem From The Affordable Care Act
Following significant debt issuance over the past few years, peaking at about $150 billion in 2011, issuance for the first half of 2013 for rated health care companies is on track to be similar to 2012 levels in the $120 billion area. While the vast majority of the proceeds from debt issuance will likely be used to refinance existing debt, companies will also likely raise new debt for M&A activity and shareholder distributions, for private equity-owned companies and large multinationals. Funding needs for capital expenditures is minimal for the sector given the strong cash flow generation and the low capital-intensity of the business. Organic growth rates remain sluggish for the sector, so we expect M&A activity to remain high for 2013. Volume is on track to outpace that of 2012, when there were five multibillion dollar transactions, predominately in pharmaceuticals; six sizable transactions have been announced already. Large recent transactions include Thermo Fishers acquisition of Life Technologies for $14 billion, Valeants acquisition of Bausch & Lomb for $8.7 billion, and Actavis' acquisition of Warner Chilcott for $8.5 billion. The transactions (with the exception of Actavis' 100% equity funded transaction) are substantially funded with debt, given the low interest rates. The main activity drivers are pricing pressure from government payors, the need for pharmaceutical companies to replace revenues lost to patent expiration, and the active role of private equity investors (which is always very prominent in this sector).

Financial risk profiles to remain generally stable

We believe financial profiles will remain generally stable for the vast majority of the health care sector. However, we could see some modest erosion for some participants with continued leveraged M&A activity and revenue pressure combined with the limits of continued cost cutting. We expect adjusted debt-to-EBITDA leverage to remain relatively stable at current levels, averaging in the low-2x area (weighted average) for the sector and with median leverage in the mid- to high-4x area, especially given its steady, predictable demand and good cash flow characteristics. We currently

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Debt Issuance And M&A Notwithstanding, Outlook For U.S. Consumer, Retail, And Health Care Sectors Is Stable

assess liquidity to be adequate or better for roughly 93% of the rated healthcare companies.

Related Criteria And Research

The Credit Cloud: China Will Leapfrog The U.S. In The Race For $53 Trillion In Capital Funding, May 14, 2013 Conditions Are Ripe for North American M&A To Surge, April 8, 2013 The Credit Overhang: U.S. Corporations Have Underinvested By $175 Billion To Bolster Cash, Dec. 12, 2012

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