TEXT-S&P rates Bausch & Lomb

Thu Apr 19, 2012 3:35pm EDT

Overview	
    -- Bausch & Lomb Inc. is refinancing its debt to fund acquisitions and 	
extend debt maturities. With the incremental debt, we calculate the 	
refinancing will raise adjusted debt leverage to about 6.5x at year end 2012 	
from 5.1x at Dec. 31, 2011.	
    -- We are affirming our 'B+' corporate credit rating and stable outlook, 	
and our 'B' debt rating and '5' recovery rating for the company's outstanding 	
$650 million senior unsecured notes.  	
    -- We are assigning a 'B+' debt rating and '3' recovery rating to the 	
company's $3.5 billion senior secured credit facility. The ratings indicate 	
expectations of meaningful recovery (50%-70%) in the event of a default.	
    -- We are lowering our senior secured debt rating to 'B+' from 'BB-', and 	
our senior secured recovery rating to '3' from '2'. 	
    -- Our stable rating outlook on Bausch & Lomb reflects expectations of 	
low to mid single digit sales growth, improving EBITDA margins, and gradual 	
deleveraging.	
 	
Rating Action	
On April 19, 2012, Standard & Poor's Ratings Services assigned its B+' rating 	
to Bausch & Lomb Inc's $3.5 billion senior secured credit facility. In 	
addition, we affirmed our 'B+' corporate credit rating, 'B' debt rating, and 	
'5' recovery rating on the company's senior unsecured debt. Our rating outlook 	
remains stable. We are lowering our senior secured debt rating to 'B+' from 	
BB-, and our senior secured recovery rating to 3 from 2. 	
	
Rationale	
The rating on Rochester, N.Y.-based Bausch & Lomb Inc. reflects its 	
"satisfactory" business risk profile and "highly leveraged" financial risk 	
profile. Adjusted debt to EBITDA declined meaningfully after the leveraged 	
buyout by Warburg Pincus in October 2007, but the refinancing will raise 	
adjusted debt leverage to about 6.5x at year end  2012 from 5.1x at Dec. 31, 	
2011. We are modifying our business risk qualifier to "satisfactory" from 	
"fair" because of improving operations. 	
	
We expect Bausch & Lomb's revenues to grow in the mid-single digits in 	
constant currency, about equal to the pace of 2011. In our view, stronger 	
pharmaceutical segment sales will continue to offset lackluster vision care 	
performance. We expect the EBITDA margin to be stable in 2012 over 2011, as 	
some cost-containment benefits are offset by the integration of lower-margin 	
Ista Pharmaceuticals. Thereafter, we expect the EBITDA margin to grow by about 	
50 basis points annually, on operational leverage and product mix. We believe 	
cash flow will improve in 2012 because of EBITDA growth and lack of 	
restructuring payments, and will continue to improve as revenues and margins 	
strengthen. We believe free operating cash flow will modestly strengthen 	
annually, and be sufficient to cover capital expenditure needs and the cost to 	
acquire outstanding shares of refractive joint venture Technolas Perfect 	
Vision GmbH (TPV). TPV (formed with 20/10 Perfect Vision AG in January 2009) 	
does not yet make a meaningful contribution to revenues. 	
	
The "satisfactory" business risk profile reflects diversity in ophthalmology 	
product offerings (vision care, pharmaceuticals, and surgical), a vast global 	
network and brand recognition, ongoing strong performance in the 	
pharmaceuticals segment, an improving product pipeline, and strengthening 	
EBITDA margins; the EBITDA margin is currently weak relative to medical device 	
and pharmaceutical company peers. We believe the Ista Pharmaceuticals Inc. 	
acquisition will complement Bausch & Lomb's existing pharmaceutical portfolio, 	
and strengthen its development capabilities and pipeline; Bausch & Lomb 	
provides much of the contract manufacturing for Ista Pharmaceutals' products 	
and has an overlapping customer base. Still, risks include technology risk and 	
competitive threats from larger players; Bausch & Lomb competes in the 	
pharmaceutical space with Allergan Inc. and Novartis/Alcon, and we expect the 	
company to be acquisitive. Still, lackluster performance over the past few 	
years, including market share loss in the soft contact lens market and lower 	
sales of intraocular lenses, reflects technology risk; Bausch & Lomb has 	
fallen to a trailing fourth position in global soft contact lens market share 	
behind Vistakon (a division of Johnson & Johnson, with more than 40% of the 	
market), CIBA Vision (Novartis AG/Alcon), and The Cooper Cos. Although Bausch 	
& Lomb appears to have stabilized the decline in contact lens sales, it 	
remains at a competitive disadvantage given its first-generation silicone 	
hydrogel (SiH) material, and lack of a daily SiH offering. Bausch & Lomb 	
continues to strengthen the diversity of its product pipeline, which supports 	
its satisfactory business risk profile. Acquisitions of pharmaceutical 	
marketing rights (Zirgan and Miochol-E), and recent product introductions such 	
as PureVision 2 HD contact lenses, BioTrue multipurpose solution, and the 	
Stellaris PC Vision Enhancement System spurred growth. We believe the 	
acquisition of Ista Pharmaceuticals and outstanding shares of TPV adds future 	
growth platforms with minimal integration risk; TPV is in the process of 	
rolling out its VICTUS femtosecond laser.	
	
Liquidity	
We believe Bausch & Lomb currently has adequate liquidity to meet its needs 	
over the coming year, and no near-term maturities. The refinancing will extend 	
debt maturities to 2017 for the revolver and 2019 for the term loans; the $650 	
million senior unsecured notes mature in November 2015. Bausch & Lomb 	
maintains a moderate cash balance, and will have full availability on its $500 	
million revolving credit facility after the transaction.	
	
Our view of the company's liquidity profile incorporates the following 	
expectations:	
     -- We expect liquidity sources (consisting primarily of cash and 	
discretionary cash flow to exceed uses by 1.2x over the coming year.	
     -- We expect liquidity sources to exceed uses, even if EBITDA declines by 	
20%.	
     -- We believe the company could absorb a high-impact, low-probability 	
event.	
     -- We view the new bank facility as covenant light; there is a leverage 	
test only if the revolver is drawn. Additionally, since only key relationship 	
banks are part of the revolver, covenant amendments would be more easily 	
negotiated.	
     -- We estimate a 30% EBITDA decline could preclude a revolver draw down.  	
     -- In our assessment, the company has well-established bank 	
relationships. However, sponsor ownership and high debt leverage could hurt 	
prospective access to capital in the future.	
	
Recovery analysis	
Our rating on Bausch & Lomb's secured credit facility, which consists of a $2 	
billion secured term loan, a $600 million European secured term loan, a $350 	
million delayed draw facility, and a $500 million revolving credit facility is 	
'B+'. The recovery rating is '3' (the same as the corporate credit rating), 	
indicating prospects for meaningful (50%-70%) recovery in the event of 	
default. The company's $650 million senior notes are rated 'B', with a 	
recovery rating of '5', indicating prospects for modest (10%-30%) recovery in 	
the event of a default. (For the complete recovery analysis, please see the 	
recovery report on Bausch & Lomb Inc., to be published following this report 	
on RatingsDirect.)	
	
Outlook	
Our stable rating outlook on Bausch & Lomb reflects expectations of low- to 	
mid-single-digit sales growth, improving EBITDA margins, and gradual 	
deleveraging. The outlook supposes the company will be acquisitive, but will 	
finance subsequent acquisitions with internally generated cash. Given our view 	
of business risk, we do not believe that a downgrade would occur as a result 	
of sales or margin pressures. Rather, a downgrade would most likely be 	
precipitated by a material debt financed acquisition, or an unexpected event, 	
such as a material adverse tax ruling or product recall that would trigger a 	
material revolver draw down. 	
Related Criteria And Research	
     -- Methodology And Assumptions: Liquidity Descriptors For Global 	
Corporate Issuers, Sept. 28, 2011	
     -- Criteria Guidelines For Recovery Ratings, Aug. 10, 2009	
     -- Business Risk/Financial Risk Matrix Expanded, May 27, 2009	
     -- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008	
	
Ratings List	
Downgraded	
                                        To                 From	
Bausch & Lomb Inc.	
 Senior Secured                         B+                 BB-	
	
Bausch & Lomb B.V.	
 Senior Secured                         B+                 BB-	
	
New Rating	
	
Bausch & Lomb Inc.	
 Senior Secured                         B+                 	
	
Bausch & Lomb B.V.	
 Senior Secured                         B+                 	
	
Ratings Affirmed	
	
Bausch & Lomb Inc.	
 Corporate Credit Rating                B+/Stable/NR       	
	
Bausch & Lomb Inc.	
 Senior Unsecured                       B                  	
	
Downgraded	
                                        To                 From	
Bausch & Lomb Inc.	
 Senior Secured	
  US$1.2 bil sr secd term bank ln due   B+                 BB- 	
  04/26/2015                            	
   Recovery Rating                      3                  2	
  US$500 mil. sr secd revolv bank ln    B+                 BB- 	
  due 10/26/2013                        	
   Recovery Rating                      3                  2	
  US$300 mil delayed draw term bank ln  B+                 BB- 	
  due 04/26/2015                        	
   Recovery Rating                      3                  2	
	
Bausch & Lomb B.V.	
 Senior Secured Debt                    B+                 BB- 	
  Recovery Rating                       3                  2	
	
New Rating	
	
Bausch & Lomb Inc.	
 Senior Secured	
  US$350 mil delayed draw term bank ln  B+                 	
   Recovery Rating                      3                  	
  US$2.028 bil term bank ln             B+                 	
   Recovery Rating                      3                  	
  US$500 mil revolver bank ln           B+                 	
   Recovery Rating                      3                  	
	
Bausch & Lomb B.V.	
 Senior Secured	
  EUR600 mil bank ln                    B+                 	
   Recovery Rating                      3                  	
	
Ratings Affirmed	
	
Bausch & Lomb Inc.	
 Senior Unsecured Debt                  B                  	
  Recovery Rating                       5
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