(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.
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.
—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.
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
Primary Rating Analyst
Fitch Ratings, Inc.
111 Congress Avenue Suite 2010
Secondary Rating Analyst
Robert Kirby, CFA
Patrick Finnegan, CFA, CPA
Media Relations: Elizabeth Fogerty, New York, Tel: +1 212 908 0526, Email: firstname.lastname@example.org.
Additional information is available on www.fitchratings.com
Corporate Rating Criteria (pub. 01 May 2020) (including rating assumption sensitivity)
Corporates Notching and Recovery Ratings Criteria (pub. 14 Oct 2019) (including rating assumption sensitivity)
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
ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here IN ADDITION, THE FOLLOWING here DETAILS FITCH'S RATING DEFINITIONS FOR EACH RATING SCALE AND RATING CATEGORIES, INCLUDING DEFINITIONS RELATING TO DEFAULT. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE CODE OF CONDUCT SECTION OF THIS SITE. DIRECTORS AND SHAREHOLDERS RELEVANT INTERESTS ARE AVAILABLE here FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.
Copyright © 2020 by Fitch Ratings, Inc., Fitch Ratings Ltd. and its subsidiaries. 33 Whitehall Street, NY, NY 10004. Telephone: 1-800-753-4824, (212) 908-0500. Fax: (212) 480-4435. Reproduction or retransmission in whole or in part is prohibited except by permission. All rights reserved. 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. The manner of Fitch’s factual investigation and the scope of the third-party verification it obtains will vary depending on the nature of the rated security and its issuer, the requirements and practices in the jurisdiction in which the rated security is offered and sold and/or the issuer is located, the availability and nature of relevant public information, access to the management of the issuer and its advisers, the availability of pre-existing third-party verifications such as audit reports, agreed-upon procedures letters, appraisals, actuarial reports, engineering reports, legal opinions and other reports provided by third parties, the availability of independent and competent third- party verification sources with respect to the particular security or in the particular jurisdiction of the issuer, and a variety of other factors. 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. As a result, despite any verification of current facts, ratings and forecasts can be affected by future events or conditions that were not anticipated at the time a rating or forecast was issued or affirmed.
The information in this report is provided “as is” without any representation or warranty of any kind, and Fitch does not represent or warrant that the report or any of its contents will meet any of the requirements of a recipient of the report. A Fitch rating is an opinion as to the creditworthiness of a security. This opinion and reports made by Fitch are based on established criteria and methodologies that Fitch is continuously evaluating and updating. Therefore, ratings and reports are the collective work product of Fitch and no individual, or group of individuals, is solely responsible for a rating or a report. The rating does not address the risk of loss due to risks other than credit risk, unless such risk is specifically mentioned. Fitch is not engaged in the offer or sale of any security. All Fitch reports have shared authorship. Individuals identified in a Fitch report were involved in, but are not solely responsible for, the opinions stated therein. The individuals are named for contact purposes only. A report providing a Fitch rating is neither a prospectus nor a substitute for the information assembled, verified and presented to investors by the issuer and its agents in connection with the sale of the securities. Ratings may be changed or withdrawn at any time for any reason in the sole discretion of Fitch. Fitch does not provide investment advice of any sort. Ratings are not a recommendation to buy, sell, or hold any security. Ratings do not comment on the adequacy of market price, the suitability of any security for a particular investor, or the tax-exempt nature or taxability of payments made in respect to any security. Fitch receives fees from issuers, insurers, guarantors, other obligors, and underwriters for rating securities. Such fees generally vary from US$1,000 to US$750,000 (or the applicable currency equivalent) per issue. In certain cases, Fitch will rate all or a number of issues issued by a particular issuer, or insured or guaranteed by a particular insurer or guarantor, for a single annual fee. Such fees are expected to vary from US$10,000 to US$1,500,000 (or the applicable currency equivalent). The assignment, publication, or dissemination of a rating by Fitch shall not constitute a consent by Fitch to use its name as an expert in connection with any registration statement filed under the United States securities laws, the Financial Services and Markets Act of 2000 of the United Kingdom, or the securities laws of any particular jurisdiction. Due to the relative efficiency of electronic publishing and distribution, Fitch research may be available to electronic subscribers up to three days earlier than to print subscribers.
For Australia, New Zealand, Taiwan and South Korea only: Fitch Australia Pty Ltd holds an Australian financial services license (AFS license no. 337123) which authorizes it to provide credit ratings to wholesale clients only. Credit ratings information published by Fitch is not intended to be used by persons who are retail clients within the meaning of the Corporations Act 2001
Fitch Ratings, Inc. is registered with the U.S. Securities and Exchange Commission as a Nationally Recognized Statistical Rating Organization (the "NRSRO"). While certain of the NRSRO's credit rating subsidiaries are listed on Item 3 of Form NRSRO and as such are authorized to issue credit ratings on behalf of the NRSRO (see here), other credit rating subsidiaries are not listed on Form NRSRO (the "non-NRSROs") and therefore credit ratings issued by those subsidiaries are not issued on behalf of the NRSRO. However, non-NRSRO personnel may participate in determining credit ratings issued by or on behalf of the NRSRO.