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TEXT-S&P affirms Biomet Inc ratings
July 25, 2012 / 3:18 PM / 5 years ago

TEXT-S&P affirms Biomet Inc ratings

 (The following statement was released by the rating agency)
 
Overview
  -- 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

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