Morningstar Advisor - June/July 2010 - 38

Spotlight

Our Favorite Individual Bond Issues
Company & Morningstar Credit Rating Issue Coupon(%) Maturity Price($) Yield(%) Callable Outstanding($)

Zimmer Holdings ZMH AA1 Mead Johnson Nutrition MJN A2 Valeant Pharmacueticals VRX BBB2 KLA-Tencor KLAC A1 Actuant ATU BBB2 Pride International PDE BBB2 Biogen Idec BIIB AA2 Becton, Dickinson and Co. BDX AA1

Senior unsecured Senior unsecured Senior unsecured Senior unsecured Senior unsecured Senior unsecured Senior notes Convertible notes Senior notes Senior notes Senior notes Senior notes Senior unsecured Senior unsecured Senior unsecured Senior unsecured

4.625 5.750 3.500 8.375 7.625 6.900 6.875 2.000 7.375 8.500 6.000 6.875 4.550 4.900 5.000 6.000 6.250 6.000 6.875

Nov 2019 Nov 2039 Nov 2014 Jun 2016 Mar 2020 May 2018 Jun 2017 Nov 2023 Jul 2014 Jun 2019 Mar 2013 Mar 2018 Apr 2013 Apr 2018 May 2019 May 2039 Dec 2017 Jan 2033 Dec 2037

101.50 98.60 100.20 104.50 101.75 111.90 98.00 112.40 103.30 114.00 108.30 113.20 107.30 103.30 106.10 109.50 111.00 101.55 116.30

4.625 5.850 3.460 7.440 7.480 5.080 7.240 1.020 6.470 6.440 2.910 4.960 1.990 4.400 4.190 5.350 4.519 5.875 5.700

Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes

500 mil 500 mil 500 mil 365 mil 400 mil 750 mil 250 mil 150 mil 500 mil 500 mil 450 mil 550 mil 201 mil 205 mil 494 mil 245 mil 650 mil 300 mil 350 mil

Kohl’s KSS A1

Senior unsecured Senior unsecured Senior unsecured

Sources: Trace, IDC, Finra, and Bloomberg. Data as of May 7, 2010, and May 10, 2010.

Credit Rating Rationale

The company’s rating of A2 reflects its good financial health, strong credit metrics, narrow economic moat, and medium Morningstar Uncertainty Rating. The company easily covers its contractual obligations over our forecast period by several times. Mead Johnson does not have any near-term maturities, with the earliest bond maturity of $500 million due in November 2014. The firm should generate more than enough free cash flow to retire the bond issue when it comes due. Although Mead Johnson has negative book equity—the result of a large dividend paid to the previous parent company—the company rates highly along other financial metrics, and the low volatility of the firm’s asset base and high equity cushion earn it a strong Distance to Default score.
Investment Rationale

bonds have been trading more in line with our rating than those of the agencies. Even so, we think the prices are attractive. Mead Johnson’s 2014 bonds offer a good spread versus similarly dated Treasuries. And we believe that credit spreads could tighten as the company deleverages.

Credit Rating Rationale

Valeant Pharmacueticals VRX BBB2
Business Risk Cash-Flow Cushion Solvency Score Distance to Default

Fair

Good

Good

Very Good

Background

We rate Mead Johnson higher than it is rated by Standard & Poor’s and Moody’s, and the

Valeant Pharmaceuticals specializes in the development and commercialization of neurology and dermatology drugs. The firm sells more than 100 branded products in the United States, Canada, and Australia, and it offers branded generic products in Eastern Europe and Latin America.

The firm’s rating of BBB2 reflects our worst-case scenario, which assumes that Valeant’s key pipeline candidates—retigabine (primarily for epilepsy) and taribavirin (for hepatitis C)—never receive regulatory approval and its business doesn’t grow as quickly as we expect in our base-case scenario. We’ve adjusted our credit rating further downward to compensate for our belief that it would be much tougher in that scenario to tap the equity market for more capital. Also, a substantial stock price decline would likely push Valeant’s convertible debt issues far out of the money, meaning the firm would need to make cash outflows to meet a $50 million debt obligation later this year and a $225 million debt obligation in 2013, deflating the firm’s Cash-Flow Cushion. Also, without those new product growth drivers, managers may try to acquire their way back to growth. Our Cash-Flow Cushion reflects a potential $350

38 Morningstar Advisor June/July 2010
Morningstar Advisor - June/July 2010

Table of Contents for the Digital Edition of Morningstar Advisor - June/July 2010
