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Share buy-back puts Walgreen on downgrade watch

By Danielle Robinson

NEW YORK, Aug 6 (IFR) - Walgreen (NYSE: WAG - news) could lose its highest credit rating from Moody's over a US$3bn share buy-back announced Wednesday to placate equity holders after deciding not to pursue a tax inversion when it buys the rest of UK chain Alliance Boots.

Moody's, which rates Walgreen one notch higher than Fitch and S&P's BBB flat ratings, put its Baa1 rating of the retail pharmacy company on review for downgrade after the announcement.

While Walgreen shares plunged more than 14% Wednesday, its bonds and CDS were largely unchanged.

The company already owns 45% of Alliance Boots and was thinking of using the pending purchase of the remainder in order to avoid paying the higher US corporate tax.

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But at a time when tax inversions are drawing significant attention on Capitol Hill and elsewhere, Walgreen CEO Greg Wasson told a conference call today it wasn't worth the risk of "significant potential consumer backlash and political ramifications - including the risk to our government book of business".

Instead the company said it would accelerate the purchase of the 55% stake it does not own, repurchase US$3bn shares by 2016, and target a 30%-35% dividend payout ratio going forward.

But it also reduced its 2016 operating outlook, which helped send its shares tumbling to close at US$59.20 from US$69.10 on Tuesday.

"We put their ratings on review because we don't think they will meet our leverage target of 3.25 times for their existing Baa1 rating now that they have planned to buy back more shares, at a time when they have also reduced their operating outlook for fiscal 2016," said Margaret Taylor, VP (LSE: VP.L - news) and senior credit officer at Moody's.

The bond market is now bracing itself for a substantial bond issue from Walgreen before it closes its acquisition deal with Boots in the first quarter of 2015.

The remainder of the transaction will require about US$5.3bn of cash outlays, of which about US$5bn is expected to be raised in the debt markets, according to Morningstar (NasdaqGS: MORN - news) credit analyst Julie Stralow.

Walgreen also plans to refinance the US$8.5bn of net debt it is assuming from Boots at lower rates.

"A very large new issuance will probably come to market from Walgreen in the next six months," Stralow said in a note to investors.

Walgreen's notes already trade tight to comparables like McKesson, according to Stralow, who had Walgreen 2022s at T+109bp versus McKesson 2024s at 112bp. (Reporting by Danielle Robinson; Editing by Marc Carnegie)