May 14, 2020 / 1:48 PM / in 23 days

Fitch Rates Boston Scientific's Unsecured Notes 'BBB'

(The following statement was released by the rating agency)

Fitch Ratings-Austin-May 14:

Fitch Ratings has assigned a ‘BBB’ rating to Boston Scientific Corp.’s unsecured notes issuance. The transaction is expected to be leverage neutral. The ratings are supported by the strength of Boston Scientific’s operational profile, improving FCF profile and liquidity reserves. Gross debt/EBITDA is currently elevated for the rating due to financing the BTG plc acquisition and temporary demand impacts from the coronavirus pandemic. Fitch anticipates leverage will decline below 3.0x by YE 2021 as debt reduction is prioritized over share repurchases.

Key Rating Drivers

Coronavirus Impact: Fitch expects Boston Scientific’s revenue demand will be dampened over the near term as elective surgeries continue to be deferred and that volumes could come back slowly as the pandemic persists. Temporary cost reduction efforts are assumed to not fully offset the impact of lower demand on a largely fixed cost structure, resulting in near-term EBITDA margin compression. Management of cash spending should help to preserve liquidity, and reduce short-term debt over the next year, supporting the ‘BBB’ Issuer Default Rating (IDR).

Leverage to Moderate Following BTG: The acquisition of BTG plc was largely debt-funded, but Fitch expects debt reduction through term loan repayments and modest cost synergies will help to reduce total debt/EBITDA to roughly below 3.0x by YE 2021. Boston Scientific’s internal focus on revenue growth, cost control and an improving sales mix will support continued EBITDA margin expansion over the long term. Fitch believes that Boston Scientific will focus cash deployment on some debt reduction and targeted acquisitions in areas that offer innovation and growth as the company has committed to suspend share repurchases as it reduces leverage.

Litigation Risk Declining: Boston Scientific has made material progress in resolving litigation issues, resulting in an improved litigation risk profile compared to six years ago. However, some financial risk related to litigation remains. Fitch expects the vast majority of the Pelvic Mesh cash settlements to be resolved by YE 2020. In addition, Fitch expects the company will continue to be disciplined in regards to cash deployment priorities while successful resolution of the litigation profile improves available cash for growth opportunities.

FCF Improving: FCF for the LTM period ended March 31, 2020 has improved materially following an unfavorable swing in working capital largely attributable to legal reserves in 2018. Improving sales and margins aided by continued cost controls and new product introductions should drive positive FCF going forward. The strong operational profile and lack of need to reserve cash for litigation provides more cash for capital deployment starting in 2020. Fitch believes the company will have more flexibility to pursue targeted acquisitions without incurring meaningful debt.

Focus on High-Growth Segments: Boston Scientific continues to focus on its high growth markets, including neuromodulation, peripheral interventions and structural heart. The company’s high growth businesses currently constitute roughly 25% of revenue and contribute high-single to double-digit growth. Approximately half of revenue is attributable to moderate growth businesses, including endoscopy, and core urology and pelvic health, and offer mid-single-digit growth profiles. The remaining portion of the business (pacers, defibrillators, and drug-eluting stents) contributes low to flat growth and Fitch expects revenues will continue to shift to the high-growth markets.

Fitch expects Boston Scientific will continue to launch new products in these respective markets. An already strong internal RD pipeline will likely be further supported by a preference for tuck-in to mid-sized acquisitions going forward. In addition, the company will likely continue to expand its presence in emerging markets.

Derivation Summary

Boston Scientific Corp. (BBB/Stable) is a large diversified medical device firm focusing on interventional cardiology, peripheral interventions, cardiac rhythm management, electrophysiology, endoscopy, urology, pelvic health and neuromodulation. The company provides physicians with innovative medical devices, which it develops through internal RD, acquisitions or collaborations. Boston Scientific and the industry face some pricing headwinds. However, Boston Scientific continues to develop innovative products that offer value to physicians, patients and providers, helping to mitigate pricing pressure.

Boston Scientific is similar in scale and diversification to Baxter International (A-/Stable), although the companies’ product portfolios differ significantly. Baxter maintains a more conservative capital structure, helping to support the difference in IDRs. While smaller than some of its competitors such as Becton, Dickinson and Company (BBB-/Stable), Boston Scientific has a relatively broad medical device portfolio that enables the company to remain very competitive both domestically and internationally.

Key Assumptions

—Near-term impact of COVID-19 is expected to weaken top-line growth; Mid- to strong-single-digit organic revenue growth expected in normalized periods;

—Near-term EBITDA margin pressure, assuming temporary cost reductions are not able to fully offset pull-through effect from largely fixed cost structure;

—EBITDA margin gradually improving in normalized periods driven by favorable mix, improving operating efficiencies and synergies from continued acquisition integrations;

—FCF remains relatively stable due to cash management efforts;

—Some near-term maturities expected to be repaid, but the bulk of debt is expected to be refinanced as it comes due;

—Total debt/EBITDA declining around or below 3.0x by YE 2021 through stabilizing operations and some debt reduction.

RATING SENSITIVITIES

Factors that could, individually or collectively, lead to positive rating action/upgrade:

—Continued operational improvements that support long-term positive revenue growth and margin stability/improvement;

—An operational profile that could lead to FCF/debt sustained around 20%;

—Cash deployment policy and resulting capital structure that would durably sustain total debt/EBITDA below 2.5x.

Factors that could, individually or collectively, lead to negative rating action/downgrade:

—Material and lasting deterioration in operations and FCF that led to FCF/debt durably below 10%;

—Persistent increase in total debt/EBITDA above 3.0x;

—Acquisitions without the prospect of timely debt/leverage reduction;

—Large legal settlements that would need to be funded with significant debt issuances.

Best/Worst Case Rating Scenario

International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit here

Liquidity and Debt Structure

Sufficient Liquidity: Boston Scientific has sufficient liquidity, including a $2.75 billion committed revolving credit facility, a $2.75 billion CP program fully backed by the revolving credit facility and $370 million of cash on hand at March 31, 2020. Liquidity is bolstered by consistently solid cash generation, and Fitch expects liquidity to remain strong throughout the forecast period.

Debt Maturities Manageable: Boston Scientific’s debt maturities are well laddered and not onerous compared to its improving FCF profile. Fitch expects the company will refinance bond maturities as they come due, outside of larger leveraging transactions.

Date of Relevant Committee

19 December 2019

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

Boston Scientific Corporation

——senior unsecured; Long Term Rating; New Rating; BBB

Contacts:

Primary Rating Analyst

Caitlin Blalock,

Associate Director

+1 512 215 3732

Fitch Ratings, Inc.

111 Congress Avenue Suite 2010

Austin 78701

Secondary Rating Analyst

Robert Kirby, CFA

Director

+1 312 368 3147

Committee Chairperson

Patrick Finnegan, CFA, CPA

Senior Director

+1 646 582 4620

Media Relations: Elizabeth Fogerty, New York, Tel: +1 212 908 0526, Email: elizabeth.fogerty@thefitchgroup.com.

Additional information is available on www.fitchratings.com

Applicable Criteria

Corporate Rating Criteria (pub. 01 May 2020) (including rating assumption sensitivity)

here

Corporates Notching and Recovery Ratings Criteria (pub. 14 Oct 2019) (including rating assumption sensitivity)

here

Applicable Model

Numbers in parentheses accompanying applicable model(s) contain hyperlinks to criteria providing description of model(s).

Corporate Monitoring & Forecasting Model (COMFORT Model), v7.7.0

1-here

Additional Disclosures

Solicitation Status

here

Endorsement Status

here

Endorsement Policy

here

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