Thermo Fisher designed a capital structure for financing the deal that would ret

Question

Thermo Fisher designed a capital structure for financing the deal that would retain its investment grade credit rating. To do so, it targeted a debt to total capital and interest coverage ratio consistent with the industry average for these credit ratios. What is the potential impact on Thermo Fisher’s ability to retain an investment grade credit rating if it had financed the takeover using 100% senior debt? Explain your answer. (Hint: In the Sources and Uses section of the Acquirer Transaction Summary Worksheet, set excess cash, new common shares issued, and convertible preferred shares to zero. Senior debt will automatically increase to 100% of the equity consideration plus transaction expenses.57) Undo changes to the model before answering subsequent questions.

Explanation / Answer

Use of 100% senior debt will alter the debt to asset ratio and interest coverage ratio of the firm. It will make a significant shift from the industry averages. Thus, it will not go down well with respect to the credit ratings. It will cause credit ratings to come down.

Also, 100% senior debt will cause significant rise in financial risk. It will also lead to rise in cost of debt capital due to 100% senior debt. It will further boost the chances of downgrading of credit rating of the firm.

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