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Fitch Downgrades and Withdraws Drive DeVilbiss' Ratings; Outlook Negative
November 9, 2017 / 10:27 PM / a month ago

Fitch Downgrades and Withdraws Drive DeVilbiss' Ratings; Outlook Negative

(The following statement was released by the rating agency) CHICAGO, November 09 (Fitch) Fitch Ratings is downgrading and subsequently withdrawing the ratings of Medical Depot Holdings, Inc., dba Drive DeVilbiss Healthcare (DDV), as the issuer has chosen to stop participating in the rating process. Therefore, Fitch will no longer have sufficient information to maintain the ratings. Accordingly, we will no longer provide ratings for Medical Depot Holdings, Inc. KEY RATING DRIVERS DDV's ratings and Negative Outlook reflect headwinds to the company's operating profile as well as a longer time to de-lever post the January 2017 LBO than was originally anticipated. Competitive Markets: The Durable Medical Equipment (DME) market is highly competitive, including a large number of competitors of similar or greater size that compete directly with DDV with similar products. Despite these competitive pressures, the company has consistently generated double-digit organic growth supplemented with targeted acquisitions. High Post-LBO Leverage: Leverage is high following the Clayton, Dubilier & Rice (CD&R) transaction in January 2017 and DDV's capital deployment strategy has historically been fairly aggressive, specifically with respect to M&A. However, in the near term Fitch expects management to focus on realizing operational efficiencies and projects that EBITDA growth could reduce leverage. Historically Challenged Cash Generation: DDV's historically weak cash flows are a constraint to the ratings. Operational and supply chain initiatives instituted over the past 12 months, as well as the addition of new-sponsor CD&R's resources, suggest that margin expansion, improved inventory management and accompanying cash generation are possible. DDV's future ability to generate at least breakeven FCF is important to maintain ratings at the current 'B-' level. Favorable Secular Trends: The aging of the global population will generate increased demand for DDV's product offerings, which are predominantly mobility aids, beds, respiratory aids, and bath and safety devices. Each of these products is most often used by patients aged 65 and older. Fitch expects the aging of the global population to provide a tailwind to revenues. Growth prospects should be further bolstered by an ongoing shift toward value-based products and services and a shift in care toward lower-cost settings, including home health services. Moderate Reimbursement Risk: DDV is a business-to-business provider that does not directly face reimbursement exposure, but does have indirect exposure to third-party pricing pressure from dealers who sell to end users. DDV's market position as a low-cost "value" provider could further insulate the company from potential reimbursement constraints and pricing pressure from private payors. DERIVATION SUMMARY DDV is a global DME provider that supports the daily care and living needs of chronically ill, disabled and elderly patients. The company focuses primarily on homecare and consumer sales, and is establishing a presence in long-term care and acute care facilities. DDV has a more comprehensive product offering across categories as compared to most of its smaller, non-rated, competitors. Hill-Rom Holdings, Inc. (bb-*) is larger in terms of revenue and has a significant presence in acute and extended care facilities. DME manufacturers often have ratings in the 'B/BB' range and maintain moderately high leverage, but can generate positive FCF due to high margins and relatively light capex requirements. KEY ASSUMPTIONS Fitch's key assumptions within our rating case for the issuer include; --Mid-single-digit organic revenue growth over the forecast period; --EBITDA margins expand by over 300bps over the forecast period, reflecting significant expense savings stemming from various operational efficiency initiatives started in late 2015; --No acquisitions or shareholder payouts over the forecast period; --Operating cash flows (OCF) and FCF (defined as OCF minus CAPEX and shareholder dividends) turn positive in 2018 and remain so throughout the remainder of the forecast period. RATING SENSITIVITIES Rating sensitivities are no longer relevant given today's withdrawal. LIQUIDITY Adequate Liquidity: The company has historically maintained sufficient liquidity through on-balance-sheet cash and availability under its revolver. Negative Cash Flows: DDV's cash generation has been pressured in recent years by negative working capital swings and non-recurring expenses, largely related to acquisition costs and restructuring and efficiency efforts. The restructuring and acquisition expenses have continued into 2017 as the company continued to implement supply chain initiatives and integrated acquisitions. FULL LIST OF RATING ACTIONS Fitch has downgraded and withdrawn the following ratings: Medical Depot Holdings, Inc. (dba Drive DeVilbiss Healthcare) --Long-Term Issuer Default Rating 'B-' with a Negative Outlook; --Senior first-lien secured credit facility 'B+'/'RR2'; --Senior second-lien term loan 'CCC'/'RR6'. Recovery Assumptions Fitch's recovery analysis assumes a going-concern enterprise value of $570 million. The analysis employs a restructured EBITDA of $76 million. The restructured EBITDA assumes that the company is unable to realize the benefits of the current operational restructuring efforts. A going-concern EBITDA multiple of 7.5x is used. Public market multiples for healthcare medical product manufacturers vary widely depending upon size and diversification of customer end markets, but generally range from 5x-11x. The 7.5x multiple is significantly less than the median health care acquisition multiple of roughly 16x (from Fitch's research dating back to 2006). While the A/R facility is not rated, Fitch assumes it would be replaced by an equivalently sized super-senior facility in bankruptcy, and includes this in the waterfall. The first-lien secured obligations recover 75% in this scenario, resulting in a rating two notches above the IDR at 'BB-'/'RR2'. The second-lien term loan recovers 0%, which corresponds to a 'CCC+'/'RR6' rating, two notches below the IDR. Contact: Primary Analyst Robert Kirby Director +1 312-368-3147 Fitch Ratings, Inc. 70 W Madison Street Chicago, IL 60601 Secondary Analyst Caitlin Blalock Associate Director +1 512-215-3732 Committee Chairperson Megan Neuburger Managing Director +1 212-909-0501 Summary of Financial Statement Adjustments -EBITDA adjusted for non-cash stock-based compensation, non-recurring expenses related to refinancing and corporate restructuring, and certain other non-recurring expenses related to operational efficiency initiatives. For regulatory purposes in various jurisdictions, the supervisory analyst named above is deemed to be the primary analyst for this issuer; the principal analyst is deemed to be the secondary. Media Relations: Alyssa Castelli, New York, Tel: +1 (212) 908 0540, Email: alyssa.castelli@fitchratings.com; Benjamin Rippey, New York, Tel: +1 646 582 4588, Email: benjamin.rippey@fitchratings.com. Additional information is available on www.fitchratings.com Applicable Criteria Corporate Rating Criteria (pub. 07 Aug 2017) here Non-Financial Corporates Notching and Recovery Ratings Criteria (pub. 16 Jun 2017) here Parent and Subsidiary Rating Linkage (pub. 31 Aug 2016) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here Solicitation Status here#solicitation Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. 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In issuing and maintaining its ratings and in making other reports (including forecast information), Fitch relies on factual information it receives from issuers and underwriters and from other sources Fitch believes to be credible. Fitch conducts a reasonable investigation of the factual information relied upon by it in accordance with its ratings methodology, and obtains reasonable verification of that information from independent sources, to the extent such sources are available for a given security or in a given jurisdiction. 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Users of Fitch’s ratings and reports should understand that neither an enhanced factual investigation nor any third-party verification can ensure that all of the information Fitch relies on in connection with a rating or a report will be accurate and complete. Ultimately, the issuer and its advisers are responsible for the accuracy of the information they provide to Fitch and to the market in offering documents and other reports. In issuing its ratings and its reports, Fitch must rely on the work of experts, including independent auditors with respect to financial statements and attorneys with respect to legal and tax matters. Further, ratings and forecasts of financial and other information are inherently forward-looking and embody assumptions and predictions about future events that by their nature cannot be verified as facts. 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