Fitch Rates Cardinal Health's New Notes 'BBB+'

Fitch Ratings has assigned a 'BBB+' rating to Cardinal Health Inc.'s (Cardinal) new five-year and 10-year unsecured notes.

The proceeds of the new notes are expected to be used to prefund the redemption at maturity of $206 million of notes due June 2012 and $300 million of notes due June 2013. Cardinal's Issuer Default Rating (IDR) is currently 'BBB+'. The Rating Outlook is Positive. A full list of ratings is provided at the bottom of this release.

Although reported debt levels will increase in the near term, Fitch does not currently expect any material longer-term change in Cardinal's capital structure. Reported latest 12-month (LTM) leverage (debt-to-EBITDA) at March 31, 2012 of 1.2x and LTM funds from operations of $1.5 billion provides the company with exceptional flexibility at its current 'BBB+' rating. Maintenance of a 'BBB+' IDR will require leverage generally maintained between 1.2x and 1.7x. Annual free cash flow (FCF) of at least $400 million and moderate durable margin expansion resulting from the generic wave through the ratings horizon is also expected at Cardinal's current ratings.

The Positive Outlook continues to reflect Fitch's contemplation of the degree of flexibility necessary in order for the company to continue to pursue expansionary M&A over the ratings horizon. A demonstrated commitment to operating with debt leverage below 1.2x-1.3x, accompanied by continued robust cash flows and moderately expanding margins, would be necessary for an upgrade to be considered.

Cardinal has spent approximately $140 million on acquisitions in fiscal 2012, compared with $2.3 billion in 2011. Each of the acquisitions made in the past two years has been consistent with Fitch's expectations and in-line with the company's renewed focus on its core distribution business. Fitch expects the company to continue to be active in seeking M&A opportunities that drive longer-term growth in stated areas of focus.

Acquisition targets will likely include those that increase Cardinal's scale in China, traction in the specialty drug distribution market, exposure to independent retail pharmacies, or provide access to certain low-tech medical-surgical technology. Fitch sees Cardinal's significant under-representation in the important growth and profit area of specialty distribution as a key differentiator between the company and its competitors. However, the company's growth potential in China offsets this concern somewhat, albeit more for the intermediate-to-longer term.

Cardinal continues to exhibit a strong and steady operating profile, even in the face of still weak macroeconomic conditions and healthcare utilization. Since spinning off CareFusion Corp. in 2009, Cardinal has produced materially robust cash flows and has maintained steadily increasing profit margins. Fitch expects that Cardinal's operational and financial profiles will remain stable over the ratings horizon.

Though Cardinal's profit margins are slim, they are appropriate for the drug distribution industry and are expanding. Third-quarter 2012 LTM EBITDA margin was 2.04%, representing a 12 basis point increase from March 31, 2011. Fitch expects durable double-digit margin expansion over the course of the company's fiscal 2013 and 2014, as the wave of new generic drugs continues to wash over healthcare industry. Fitch notes that top-line growth is likely to be flat or moderately down in fiscal 2013 due to the impact of large volumes of much lower-priced generics in the drug channel.

Profit margins are likely to continue to be pressured by payors' overarching push to moderate the growth in healthcare spending. A growing pool of generic profits within the drug channel and recent consolidation among hospital networks could also stress sell-side profit margins for Cardinal and its peers in the intermediate term.

Total liquidity at March 31, 2012 is adequate for Cardinal's current ratings, consisting of $2.4 billion in cash and equivalents and an undrawn $1.5 billion revolver due 2016. The company also maintains an undrawn $950 million accounts receivable securitization facility due November 2012. Notes maturities are well-laddered and are estimated as follows: $206 million remaining in fiscal 2012 (June 30), $300 million in 2013, $500 million in 2015, and $1.3 billion thereafter.

Fitch currently rates Cardinal as follows:

--Long-term IDR 'BBB+';

--Short-term IDR 'F2';

--Senior unsecured credit facility 'BBB+';

--Senior unsecured notes 'BBB+';

--Commercial paper 'F2'.

The Rating Outlook is Positive. The ratings apply to approximately $2.55 billion of reported debt at March 31, 2012.

Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.

Applicable Criteria and Related Research:

--'Corporate Rating Methodology' (Aug. 12, 2011);

--'Short-Term Ratings Criteria for Non-Financial Corporates' (Aug. 12, 2011);

--'Healthcare Stats Quarterly: Fourth-Quarter 2011' (May 9, 2012);

--'Navigating the Drug Channel - Drug Distributors: A Deeper Dive' (Mar. 13, 2012);

--'Navigating the Drug Channel - An Overview: Getting to the Other Side' (Feb. 10, 2012).

Applicable Criteria and Related Research:

Navigating the Drug Channel - An Overview: Getting to the Other Side

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=670255

Navigating the Drug Channel -- Drug Distributors: A Deeper Dive

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=673889

U.S. Healthcare Stats Quarterly: Fourth-Quarter 2011

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=677054

Short-Term Rating Criteria for Non-Financial Corporates

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=663651

Corporate Rating Methodology

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=647229

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