Moody’s Investors Service has revised to negative from stable the outlook on the Aa3 long-term ratings of Novartis AG (Novartis) and its guaranteed subsidiaries, the leading provider of credit ratings, research, and risk analysis said in a statement.

“We have changed our outlook on Novartis’ Aa3 rating to negative because its planned up to $5 billion share buyback which exceeds the company’s free cash flow will be financed solely through debt. The buyback puts further strain on the company’s credit metrics, which were already weak for the Aa3 rating category prior to the announcement,” said Knut Slatten, a Moody’s Vice President and lead analyst for Novartis.

The outlook change to negative follows Novartis’ full year results on 25 January as part of which the company announced that they would embark on a debt-funded share buyback programme of up to $5 billion during the course of 2017. The buyback is well in excess of the company’s free cash flow — which Moody’s expects will reach around $1.6 billion in 2017 (as per the agency’s definition of free cash flow) — and will weaken the company’s credit metrics over the next 12 months during a period where the company expects sales to be broadly in line with 2016.The rating agency believes that Novartis credit metrics will not be commensurate with the Aa3 rating category until at least 2019.

The Aa3 rating of Novartis continues to reflect the store of value stemming from Novartis’ equity stake in Roche Holding AG (A1 stable) and from its put option on its minority stake in the joint venture consumer over-the-counter with GlaxoSmithKline plc (A2 negative).

Novartis also confirmed that the company is undergoing a strategic review of its Alcon division (around 12% of group sales) — a leading player in ophthalmology — with a view to maximize value for its shareholders.

Moody’s understands that Novartis will continue its current strategy of bolt-on acquisitions, which could amount to $2 billion – $5 billion per annum.

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