Wednesday, September 19, 2012

TEXT-S&P rates Biomet's $500 mln senior sub notes 'B-


Sept. 18 - Standard & Poor's Ratings Services said today that it assigned Warsaw, Ind.-based medical products manufacturer Biomet Inc.'s $500 million senior subordinated notes maturing 2020 its 'B-' issue-level rating (two notches below the 'B+' corporate credit rating on the company). We also assigned this debt a recovery rating of '6', indicating our expectation of negligible recovery (0 to 10%) for noteholders in the event of a payment default. In addition, our 'B-' rating on the company's 6.5% senior unsecured notes following its proposed $825 million add-on to the issue remains unchanged.

The recovery rating remains unchanged at '6'. Market conditions will determine the coupon on the senior subordinated notes. The senior subordinated notes will rank equally with the company's existing and future senior subordinated indebtedness, while the senior unsecured notes will rank equally with the company's existing and future senior unsecured indebtedness. We expect proceeds to fund the purchase of all of the company's 10% senior notes maturing 2017 and up to $500 million of the 11.625% senior subordinated notes maturing 2017. We do not expect the offering to meaningfully alter Biomet's outstanding debt, recovery prospects, or credit metrics, which include pro forma total adjusted debt to EBITDA of roughly 6x. Moreover, we believe debt leverage will remain consistent with the company's "highly leveraged" financial risk profile (partially defined as adjusted debt to EBITDA of more than 5x). The corporate credit rating on Biomet is 'B+' and the rating outlook is stable. The 'B+' rating reflects the company's "satisfactory" business risk profile and "highly leveraged" financial risk profile, according to our criteria. Biomet's satisfactory business risk profile reflects pricing pressure and the company's somewhat narrow focus in the orthopedic industry, in addition to the relatively stable nature of its industry, Biomet's relatively full orthopedic product offerings, and favorable long-term volume trends. The financial risk profile and corporate credit rating reflect our expectation for minimal debt reduction. Our fiscal 2013 forecast for adjusted funds from operations (FFO) to total debt is between 5% and 10%, well within the less-than-12% guideline for a "highly leveraged" financial risk profile. In our opinion, this key debt protection measure will not improve because of our expectation of modest revenue growth and pricing pressure that will constrain EBITDA expansion and significant improvements in cash flow in fiscal 2013. Fiscal 2012 revenue growth of 3% in constant currency was consistent with our expectations. Constant-currency revenue growth improved to 5% in the May 2012 quarter, which we believe reflects improved industry growth and some market share gains for Biomet, likely related to the launch of new products and the near completion of the trend away from metal-on-metal hips. We believe revenue growth will remain in the low- to mid-single digits in fiscal 2013, slightly above our expectations for the industry. We believe EBITDA margins, including our usual adjustments, could remain relatively flat (excluding the impact of the Affordable Care Act 2.3% medical device tax), despite ongoing pricing pressures. We expect debt leverage to remain relatively flat in fiscal 2013. (For the complete corporate credit rating rationale, see the research report on Biomet Inc., published July 25, 2012, on RatingsDirect, on the Global Credit Portal.) RELATED CRITERIA AND RESEARCH

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