The downgrade of Alere's Corporate Family Rating reflects Moody's expectation that financial leverage will be sustained well above levels that are appropriate for the previous B1 rating. Moody's estimates that debt to EBITDA at September 30, 2012, pro forma for the proposed note issuance and the estimated EBITDA contribution of acquisitions completed in the last twelve months, would have approximated 6.2 times. Moody's also expects that the company will continue to aggressively pursue acquisition opportunities, aided in part by the cash added in the proposed debt issuance and the restoration of the available revolver balance, to supplement slower organic growth.
The stable outlook reflects Moody's expectation that financial leverage will remain high in the near term given constraints on EBITDA growth from challenges in certain lines of business and the likelihood that available cash will be used for acquisitions or share repurchases in lieu of debt repayment. However, growth in recently launched products and the reentry into the diabetes segment should limit the effect of challenges in the professional diagnostic segment caused by the FDA prompted product recalls, competitive pressures in the health management business, and pricing pressure in Europe.
Following is a summary of Moody's rating actions.
$450 million senior unsecured notes due 2018 at B3 (LGD 5, 74%)
Corporate Family Rating, to B2 from B1
Probability of Default Rating, to B2 from B1
7.875% senior unsecured notes due 2016 to B3 (LGD 5, 75%) from B2 (LGD 5, 76%) (to be withdrawn following the completion of the tender offer for the notes)
9.0% senior subordinated notes due 2016 to Caa1 (LGD 5, 89%) from B3 (LGD 5, 88%)
8.625% senior subordinated notes due 2018 to Caa1 (LGD 5, 89%) from B3 (LGD 5, 88%)
Ratings affirmed/LGD assessments revised:
Senior secured revolver expiring 2016 at Ba3 (LGD 2, 29%) from Ba3 (LGD 3, 32%)
Senior secured term loan A due 2016 at Ba3 (LGD 2, 29%) from Ba3 (LGD 3, 32%)
Senior secured delayed draw term loan A due 2016 at Ba3 (LGD 2, 29%) from Ba3 (LGD 3, 32%)
Senior secured term loan B due 2017 at Ba3 (LGD 2, 29%) from Ba3 (LGD 3, 32%)
Speculative Grade Liquidity Rating at SGL-1
Alere's B2 Corporate Family Rating reflects high financial leverage in the context of an acquisitive growth strategy, alongside ongoing reimbursement pressures on healthcare providers and technological risk inherent in the highly competitive medical diagnostics industry. In addition to the potential near-term impact to earnings related to recent FDA-imposed recalls, EBITDA growth has been constrained by ongoing headwinds in Europe and operating challenges within the health management business, which have included the loss of a number of accounts and declining profitability. The ratings are supported by the company's strong competitive position within the point-of-care diagnostic tools market, as well as its solid cash flow. In addition, the ratings are supported by the company's diverse product offering, and a track record of technological innovation, which positions the company well to serve hospitals and other healthcare providers.
Moody's could downgrade the rating if leverage is expected to be sustained above 6.5 times, including Moody's adjustments for operating leases and the company's preferred stock, or if free cash flow to adjusted debt is expected to remain below 4% for a sustained period. Use of incremental debt for future acquisitions or lower than expected EBITDA, resulting from continued weakness in the professional diagnostics or health management businesses, which cause the company's credit metrics or liquidity to weaken could also result in a downgrade.
Given the company's high leverage and acquisitive strategy, a rating upgrade is unlikely in the near term. However, Moody's could upgrade the rating if the pace of acquisitions slows considerably from past levels and credit metrics improve such that adjusted debt to EBITDA declines below 5.0 times and free cash flow to debt is above 7% on a sustained basis.
Alere, Inc., headquartered in Waltham, Massachusetts, operates in health management, and professional and consumer diagnostics. The health management business includes disease management, maternity management, and wellness. Diagnostic products focus on infectious disease, cardiology, oncology, drugs of abuse and women's health. For the twelve months ended September 30, 2012, the company generated net revenues of approximately $2.7 billion.
The principal methodology used in rating Alere, Inc. was the Global Medical Product and Device Industry Methodology published in October 2009. Other methodologies used include Loss Given Default for Speculative-Grade Non-Financial Companies in the U.S., Canada and EMEA published in June 2009. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.
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Daniel Goncalves Analyst Corporate Finance Group Moody'sInvestors Service, Inc.250 Greenwich StreetNew York, NY 10007 U.S.A. JOURNALISTS: 212-553-0376 SUBSCRIBERS: 212-553-1653Peter H. Abdill, CFA MD - Corporate Finance Corporate Finance Group JOURNALISTS: 212-553-0376 SUBSCRIBERS: 212-553-1653 Releasing Office: Moody's Investors Service, Inc.250 Greenwich StreetNew York, NY 10007 U.S.A. JOURNALISTS: 212-553-0376 SUBSCRIBERS: 212-553-1653(C) 2012 Moody's Investors Service, Inc. and/or its licensors and affiliates (collectively, "MOODY'S"). All rights reserved.
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