(The following statement was released by the rating agency)
-- Warsaw, Ind.-based medical products manufacturer Biomet Inc. plans to refinance its existing cash flow revolver, and amend and extend a portion of its term debt.
-- We are affirming all existing ratings and assigning ratings to the proposed debt.
-- Our stable rating outlook on Biomet reflects our expectation for relatively stable operating trends and little debt reduction, resulting in no significant change in credit protection measures. Rating Action On July 25, 2012, Standard & Poor's Ratings Services affirmed its ratings and outlook on Biomet Inc., including the 'B+' corporate credit rating. We assigned our 'BB-' senior secured debt and '2' recovery ratings to the proposed cash flow revolver and term loan extension (amounts undisclosed), both maturing 2017. Rationale The ratings on Biomet Inc. reflect its "satisfactory" business risk profile and "highly leveraged" financial risk profile, according to our criteria. The ratings overwhelmingly 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. We believe this key debt protection measure will not improve, because we expect modest revenue growth in fiscal 2013 and pricing pressure, constraining EBITDA expansion and significant improvements in cash flow. We believe debt to EBITDA will remain well above the 5x threshold for a highly leverage financial risk profile. 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 modest 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, consistent with our expectations for the industry and about twice the rate of GDP growth. 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. Biomet's satisfactory business risk profile reflects the relatively stable nature of the orthopedic products industry. While Biomet predominantly operates within the orthopedic space, we believe it has a relatively full product offering. It is the No. 4 participant in reconstructive products, competing with Zimmer Holdings Inc., Stryker Corp., and Johnson & Johnson's DePuy division. Still, surgeons are generally loyal to known and proven products, sales force relationships are sticky, and product innovations are of an evolutionary nature. Growth is generally a function of total market demand rather than redistribution of market share, although we believe Biomet is currently outgrowing the market. The aging population, the obesity epidemic, and technology improvements that lead to less invasive, better performing implants (and thus, expanded use in younger patients) increase overall demand. However, the weak global economy and struggling hospital customers have led to volume and pricing pressures since calendar 2009. The loss of commercial insurance by the unemployed and rising coinsurance have in part lowered volume growth to the low- to mid-single-digit, but volumes stabilized and then improved in fiscal 2012. We expect pricing to be down by 1% to 2% in the near term. Commercial and Medicare reimbursement for implant procedures remain an ongoing risk, particularly given general concerns over the rising cost of health care, and any reimbursement reductions to providers would likely pressure implant pricing. We expect that most of Biomet's U.S. products will be subject to a 2.3% excise tax as part of the Affordable Care Act. While the tax will create a headwind, we believe that it will be manageable for Biomet. The tax, which begins Jan. 1, 2013, applies to U.S. sales only and will be deductible for tax purposes. Biomet is geographically diverse; U.S. sales were 60% of 2012 revenue. Its positions in spinal fixation systems, bone substitute materials, dental reconstructive implants, electrical stimulation devices, and other products, including surgical products, represent some product diversity. However, Biomet is concentrated in hip and knee implants, reported as part of its reconstructive segment. Biomet's decisions to acquire DePuy's trauma business and explore a spin-off of its dental business are not significant enough to alter our view of its business risk or financial risk profiles. On Sept. 25, 2007, LVB Acquisition LLC, a consortium of private equity funds (Blackstone Capital Partners V L.P., Goldman Sachs Investments Ltd., KKR 2006 Fund L.P., and Texas Pacific Group), acquired Biomet. At roughly 6x debt to EBITDA as of May 31, 2012, leverage remains high. However, debt leverage improved from more than 8x at the close of the 2007 LBO. Cash flows remain weak relative to its significant debt burden, but improved substantially since the LBO. We believe EBITDA growth, rather than debt reduction would be the most likely cause for further improvement in Biomet's credit metrics, but we do not project significant improvements in fiscal 2013. Liquidity We believe Biomet's liquidity is "adequate," with sources of cash exceeding mandatory uses over the next 12-24 months. Relevant aspects of Biomet's liquidity are:
-- Sources of liquidity will exceed uses by 1.2x or more.
-- Biomet's somewhat strong sources of liquidity relative to uses is tempered by its high debt leverage, which we believe limits its ability to absorb a high impact low probability event without refinancing.
-- Sources of liquidity as of May 31, 2012, included cash and cash equivalents of $492 million, but we believe the cash balance was reduced in June following the $280 million acquisition of DePuy Orthopaedics Inc.'s trauma business.
-- Biomet generated $377 million of operating cash flow in fiscal 2012; we expect a similar amount of cash flow in fiscal 2013.
-- Biomet's proposed cash flow revolving credit facility matures in 2017 and we expect it will be undrawn at close.
-- Biomet has a $350 million asset-backed revolver maturing in 2013, which provides additional liquidity.
-- Biomet is not subject to strict financial covenants under its facilities. However, if it has less than $35 million available under its senior secured asset-based revolving credit facility, it will be subject to a fixed-charge coverage covenant.
-- Our base-line projections include roughly $180 million of annual capital expenditures.
-- Acquisition activity has been modest even when factoring in the DePuy acquisition.
-- Biomet has no significant near-term maturities until 2015. Recovery analysis Biomet's senior secured asset-backed revolver is rated 'BB', with a '1' recovery rating, indicating our expectation for very high recovery (90% to 100%) in the event of default. The proposed senior secured cash flow revolver, and proposed and existing term debt are rated 'BB-', with a '2' recovery rating, indicating our expectation for substantial recovery (70% to 90%) in the event of default. Holding all other factors constant, we estimate that approximately $800 million of additional senior secured debt could lead to less than 70% recovery for Biomet's senior secured cash flow revolver and term loans, which is consistent wi