Business Context and Reporting Period
Company: McKesson Corporation
Filing Type: Form 8-K (Current Report)
Date of Report: March 10, 2014
Event Date: March 5, 2014 (Entry into Underwriting Agreement)
This filing reports the entry into a material definitive agreement and the creation of a direct financial obligation. McKesson Corporation entered into an Underwriting Agreement to issue and sell a total of $4.1 billion in notes to underwriters represented by Goldman, Sachs & Co. and Merrill Lynch, Pierce, Fenner & Smith Incorporated.
Key Financial Metrics and Debt Structure
The Company issued the following notes with a total aggregate principal amount of $4.1 billion:
- Floating Rate Notes (2015): $400 million; Interest at 3-month LIBOR + 0.40%.
- 2017 Notes: $700 million; Fixed rate of 1.292% per year.
- 2019 Notes: $1,100 million; Fixed rate of 2.284% per year.
- 2024 Notes: $1,100 million; Fixed rate of 3.796% per year.
- 2044 Notes: $800 million; Fixed rate of 4.883% per year.
Proceeds and Use of Funds:
The public offering price was 100.000% of the principal amount. The Company expects to receive net proceeds of approximately $4,068 million after deducting underwriting discounts and estimated offering expenses. These proceeds, combined with borrowings under the accounts receivable sales facility and cash on hand, are intended to repay borrowings outstanding under the Senior Bridge Term Loan Agreement dated January 23, 2014.
Debt Characteristics:
The Notes are unsecured and unsubordinated obligations, ranking equally with all existing and future unsecured indebtedness. The Floating Rate Notes are not redeemable. The fixed-rate notes may be redeemed prior to maturity subject to a make-whole premium, with specific exceptions for the 2024 and 2044 Notes after certain dates.
Material Changes and Covenants
Change in Capital Structure: The primary material change is the replacement of the Senior Bridge Term Loan with permanent long-term debt financing. This transaction alters the Company's debt maturity profile and interest rate exposure.
Covenants: The Indenture includes limitations on the Company's ability to create certain liens on assets, enter into sale and leaseback transactions, or consolidate/merge/sell substantially all assets, subject to exceptions.
Change of Control Provision: In the event of a change of control and a subsequent downgrade of the Notes below investment grade by Fitch, Moody's, and S&P, the Company must offer to repurchase the Notes at 101% of the principal amount plus accrued interest.
Outlook, Risks, and Contingencies
Management Commentary: The filing indicates a strategic move to secure long-term financing to replace bridge financing, suggesting confidence in the Company's ability to service this debt load.
Risks and Contingencies:
- Interest Rate Risk: The Floating Rate Notes expose the Company to variable interest rates based on 3-month LIBOR.
- Refinancing Risk: While the bridge loan is being repaid, the Company assumes long-term obligations with fixed interest rates that must be serviced regardless of future cash flow fluctuations.
- Legal Disclosures: The filing notes that representations and warranties in the attached agreements are for the benefit of the parties and may not reflect the actual state of affairs at the time of the filing or future developments.
Investor Verification Checklist
- Verify the exact net proceeds received ($4,068 million estimated) versus the principal amount ($4.1 billion) to confirm underwriting costs.
- Confirm the full repayment of the Senior Bridge Term Loan dated January 23, 2014, in subsequent filings.
- Monitor the 3-month LIBOR rate to assess the actual interest expense on the $400 million Floating Rate Notes.
- Review the Company's credit ratings from Fitch, Moody's, and S&P to understand the trigger points for the change of control repurchase obligation.
- Check for any subsequent amendments to the Indenture regarding the make-whole premium redemption dates for the 2024 and 2044 Notes.