Fitch Rates Merck & Co.'s Debt Offering 'AA-'

Business Wire, June 22, 2009

CHICAGO -- Fitch Ratings has assigned an 'AA-' rating to Merck & Co.'s (Merck) proposed public issuance of $3.5 billion in senior unsecured notes comprising four tranches. The debt offering comprises two-year, six-year, 10-year as well as 30-year notes. Proceeds from the senior unsecured debt are expected to be used for general corporate purposes, including short-term debt reduction.

Merck's credit ratings are as follows.

--Long-term Issuer Default Rating (IDR) 'AA-';

--Senior unsecured debt rating 'AA-';

--Bank loan rating 'AA-';

--Short-term IDR of 'F1 ';

--Commercial paper 'F1 '.

Fitch placed Merck on Rating Watch Negative on March 9, 2009.

Merck's credit profile will be pressured by the incremental debt used to complete the Schering-Plough Corp. (Schering-Plough) transaction. The deal is expected to close in the fourth quarter of 2009. The incremental $8.5 billion of debt will immediately pressure the credit profile of the pro forma combined entity, as leverage jumps to approximately 1.8 times (x) from 0.8x for Merck alone based on year-end 2008 results. The company currently plans to fund the asset purchase with a combination of commercial paper and long-term debt. However, uncertainty exists about the company's plans to address the higher leverage upon the consummation of the transaction. Fitch will ascertain the capital structure and debt reduction plans of the proposed combined entity and finalize the rating level at that time. Fitch believes that any potential downgrade would be limited to one or two notches.

Merck stated that annual synergies totaling around $3.5 billion would be targeted beyond 2011, of which 50% will be realized in the first full year, and 75% in the second year after the close of the transaction. The additional synergies are in addition to ongoing programs at each company, specifically a $1.5 billion cost reduction at Schering-Plough and around one billion program at Merck. However, Fitch expects the costs of the programs to pressure margins over the next two years. Moreover, Merck is committed to maintaining its current dividend ($1.52 per year) and to continue share repurchases.

Merck's existing $1.5 billion revolving credit facility and Schering-Plough's $2 billion revolving credit facility will remain in place after the merger is completed. There were no borrowings against either facility at the end of the first quarter. On March 31, 2009, Merck and Schering-Plough had $12.6 billion and $3.6 billion in cash and short-term securities, respectively. Additionally, Merck generated free cash flow of $207.3 million while Schering-Plough produced free cash flow of $2.2 billion for the latest 12-month period at the end of the first quarter.

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