Credit Rating Uncertainty Looms Over Johnson & Johnson
The pharmaceutical giant Johnson & Johnson, one of the few remaining US companies with a top-tier credit rating, is facing a potential downgrade from S&P Global Ratings. This comes after the company announced its acquisition of Intra-Cellular Therapies Inc., a deal valued at $14.6 billion.
A Review of J&J’s Creditworthiness
S&P Global Ratings has initiated a review of Johnson & Johnson’s credit rating, citing concerns over the company’s increasing indebtedness as a result of the acquisition. The ratings agency believes that J&J may pursue more debt-funded acquisitions in the future, which could further strain its credit profile.
The Exclusive AAA Club
Currently, only seven companies globally hold the coveted AAA rating from S&P, down from 16 a decade ago and 88 in 2005. If Johnson & Johnson’s rating is downgraded, Microsoft Corp. would be the only US company left with a AAA rating. Other companies that share this elite status include Temasek Holdings, Public Sector Pension Investment Board, and Airservices Australia.
The Impact of a Downgrade
A credit rating downgrade can increase a company’s borrowing costs, although the effect may be minimal for companies with high ratings. Johnson & Johnson has announced that it will fund the acquisition with a combination of cash and debt, and expects to close the deal this year.
Moody’s Takes a Different Stance
In contrast, Moody’s Ratings has affirmed Johnson & Johnson’s AAA rating, citing the company’s strong cash reserves and annual free cash flow generation. With over $20 billion in cash on hand, Moody’s believes that J&J has the financial flexibility to manage its debt obligations.
The Future of J&J’s Credit Profile
As the credit rating agencies continue to review Johnson & Johnson’s financial situation, the company’s future credit profile remains uncertain. One thing is clear, however: the stakes are high, and a downgrade could have significant implications for J&J’s borrowing costs and financial strategy.
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