Halyard Health Inc. Outlook Revised To Negative On Weakening Profitability

Stocks and Financial Services Press Releases Friday November 13, 2015 09:38
NEW YORK--13 Nov--Standard & Poor's

Third-quarter results for Halyard Health Inc., a provider of medical supplies and devices, fell short of our expectations on continued competition and pricing pressure in the low-margin Surgical & Infection Prevention (S&IP) segment, which represents 70% of the company's revenues.

We are revising our 2016 EBITDA estimate lower by about $10 million, following our lowering that estimate by $30 million earlier this year. We now expect adjusted EBITDA of about $215 million for 2016, as nonrecurring spin-off charges in 2015 subside, and before taking into account the potential impact of planned acquisitions.

We expect adjusted debt leverage of about 3.5x for 2015, improving to about 2.8x for 2016, which is at the weaker end of the range consistent with the current rating. With the company publicly stating plans to target up to $500 million of acquisitions in 2016, we believe credit measures may face further pressure, depending on how the company funds those acquisitions.

We are revising our outlook to negative from stable and affirming our 'BB' corporate credit rating on the company.

The negative outlook reflects credit measures that we view as somewhat weak for the rating, downside risk to our base case stemming from continued headwinds in the company's S&IP segment, and an acquisition appetite that we believe may drive leverage higher.

NEW YORK (Standard & Poor's) Nov. 12, 2015--On Nov. 12, 2015, Standard & Poor's Ratings Services today revised its rating outlook on Halyard Health Inc. to negative from stable and affirmed the 'BB' corporate credit rating.

Our 'BB' issue-level rating and '3' recovery rating on Halyard Health's $390 million senior secured term loan and $250 million revolving credit facility are unchanged. Our 'B+' issue-level rating on the company's senior unsecured notes and recovery rating of '6' are also unchanged.

The '3' recovery rating on the secured debt indicates our expectation for meaningful (50% to 70%; at the higher end of the range) recovery of principal in the event of a payment default; and the '6' recovery rating on the unsecured debt indicates our expectations for negligible (0% to 10%) recovery in the event of default.

"Halyard's operating performance in the third quarter fell short of our expectations as the company continues to face intense competition and pricing pressure in the S&IP segment, which accounts for 70% of the company's revenues," said Standard & Poor's credit analyst David Kaplan. This outweighs the mid-single-digit revenue growth in the higher-margin medical device segment. This also follows weaker-than-expected results in the first half of the year, leading us to again revise our forecast lower for 2015 and 2016.

This deterioration in financial performance is leading to credit measures that are at the weak end of the range for the rating. In addition, the company has plans for up to $500 million of acquisitions in 2016, and we believe credit measures may face further pressure, depending on how the company funds those acquisitions. We revised our outlook to negative to reflect credit measures that we view as weak for the rating, downside risk to our estimates, and an acquisition appetite that we believe may drive leverage higher.

Our negative outlook reflects credit measures that we view as somewhat weak for the rating, downside risk to our base case estimates, and an acquisition appetite that we believe may drive leverage higher.

We would likely lower the rating if we expect adjusted debt leverage to remain above 3x for an extended period. This could occur if the company finances acquisitions with debt or if the company's performance falls short of our expectations.

We would consider revising the outlook to stable if we had increased confident that adjusted debt leverage will generally remain below 3x over the next few years.

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