New York, December 12, 2012 -- Moody's Investors Service said that there is no change to Biomet, Inc.'s existing ratings including its B2 Corporate Family Rating and its B1 secured term loan ratings following the launch of a $250 million add-on to its Extended Term Loan B, maturing in July 2017. Proceeds will be used to repay a portion of a previous Term Loan, maturing in March 2015. The rating outlook remains stable.
Ratings unchanged: Biomet, Inc.Corporate Family Rating at B2
Probability of Default Rating at B2
Secured term loans at B1 (LGD 3, 35%)
Senior unsecured notes at B3 (LGD 4, 66%)
Senior subordinated notes at Caa1 (LGD 6, 93%)
Speculative Grade Liquidity Rating at SGL-2
This transaction represents a refinancing of existing debt and therefore does not affect leverage. Including savings from re-financings in July, Biomet's annual cash interest expense is expected to decline by about 15%.
"Biomet's leverage will remain high, especially if it separates its dental business, but we expect the company to be able to deleverage as it benefits from new product launches and trauma products acquired from J&J," said Diana Lee, a Moody's Senior Credit Officer.
Biomet's B2 Corporate Family Rating largely reflects its very high leverage and overall weak financial strength ratios, which represent key credit risks. However, the rating also reflects the company's relatively large size compared to other B2 companies and opportunities associated with favorable demographics. Despite historical stability, Moody's expects the sector to see ongoing volume and pricing pressure because of the weak economy, as well as hospital cost savings initiatives and high levels of competition. The reconstructive market will continue to evolve to one where product innovation is more critical. Thus Moody's anticipates higher R&D spending and potentially greater shifts in market share in certain product lines over time.
If the company does separate its 3i dental implant business, which accounts for about 9% of revenues and would likely result in higher leverage and even weaker credit metrics, Moody's does not expect an effect on ratings. Biomet should benefit from new product launches and the recent acquisition of Johnson & Johnson's (Aaa stable) Depuy trauma business, and Moody's expects that leverage would gradually decline.
The stable outlook reflects Moody's expectation that, although leverage remains very high and reconstructive use rates and pricing pressures continue, top-line growth rates will remain at least at market levels, supported by new product launches. A large debt-financed transaction, a recall action or material loss in market share that results in higher leverage or declining cash flow such that EBITA/interest approaches 1.0 time or debt/EBITDA exceeds 7.0 times, could result in a downgrade. If the company is able to demonstrate its ability to sustain at or above-market growth rates in core hips and knees and continue deleveraging such that debt/EBITDA and FCF/debt approach 5.0 times and 5%, respectively, and appear sustainable, the ratings could be upgraded.
The SGL-2 rating reflects Moody's view that Biomet's liquidity will be good over the next year. Cash balances are adequate and free cash flow will remain modest, but the company should generally have sufficient internal cash to support operations. In addition, Moody's expects Biomet to have access to ample external facilities with limited financial covenants. However, substantially all of the company's assets are pledged to bank lenders.
Moody's notes that the proposed transactions do not substantially change the capital structure of the company. However, the B3 senior notes currently benefit from the presence of substantial junior capital in the form of subordinated notes. If the amount of junior subordinated notes decreases materially or if the amount of secured debt, which is ahead of the senior notes increases, the B3 rating on the senior notes could be lowered to Caa1 even in the absence of a change in the CFR.
The principal methodology used in rating Biomet, Inc. was the Global Medical Product and Device Industry Methodology published in October 2012. Other methodologies used include Loss Given Default for Speculative-Grade Non-Financial Companies in the US, Canada and EMEA published in June 2009. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.
Biomet, Inc., (Biomet) headquartered in Warsaw, Indiana, is a global manufacturer of orthopedic products and is among the leaders in the US reconstructive market. A private equity consortium, consisting of the Blackstone Group, Goldman Sachs Capital Partners, Kohlberg Kravis Roberts and TPG, acquired Biomet for approximately $11.6 billion in July 2007.
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Diana Lee VP - Senior Credit Officer 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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