Walgreens Boots Alliance Inc. had its senior unsecured credit rating cut to junk by Moody’s Investors Service, with the credit grader citing the drugstore chain’s high debt relative to earnings and risks associated with its push to offer more healthcare services.
The downgrade to Ba2 – two steps into high-yield – reflects “Walgreens’ stubbornly high financial leverage, weak interest coverage and pressured free cash flow that Moody’s believes will be sustained over the next 12-18 months,” senior credit officer Chedly Louis wrote in a note Tuesday.
“We are disappointed by Moody’s decision today and the limited timeframe given to demonstrate the results of our deleveraging efforts and planned actions to improve underlying business performance,” a representative for Walgreens said in a statement.
Walgreens shares fells as much as 2.9% following the downgrade, erasing an earlier gain.
Walgreens still carries the lowest investment-grade rank from S&P Global Ratings, and it isn’t rated by Fitch Ratings.
Companies that are cut to junk by two credit graders are deemed “fallen angels” and have their debt move to high-yield indexes.
Although Walgreens paid down debt during its 2023 fiscal year and says it will continue to do so in 2024, the cost of the new strategy and a weaker consumer environment will likely cause the company’s debt load to peak around 6 times its earnings before interest, taxes, depreciation and amortization at the end of the 2024 fiscal year, according to the note, before recovering in 2025.
Moody’s said in October that it was considering downgrading the company. Its current outlook on Walgreens is stable.