CHICAGO--(BUSINESS WIRE)--Fitch Ratings has assigned a 'BBB-' rating to the new senior unsecured bonds issued by Owens & Minor, Inc. (NYSE: OMI). Bond proceeds are expected to be used to redeem OMI's $200 million of 2016 bonds, to fund the $233 million purchase of Medical Action Industries Inc., and for general corporate purposes.
A full list of current ratings follows at the end of this release. The Rating Outlook is Stable.
KEY RATING DRIVERS
--Pro forma for the bond issuance, Fitch expects OMI's debt leverage to approximate 2x. Ratings remain constrained by management's stated willingness to increase debt leverage for M&A. OMI's history of relatively conservative financial management, combined with what Fitch thinks are a limited number of sizeable deals currently available within OMI's core competencies, mitigate this risk.
--OMI holds a strong share (approximately 35%-40%) of the steady and oligopolistic acute care medical-surgical (med-surg) products distribution market. Fitch believes OMI is well-positioned to maintain and/or grow market share in light of hospital consolidation and physician employment trends in the U.S.
--Revenue growth is being constrained by weak utilization, flat pricing, and continued sell-side margin pressure. Fitch forecasts fairly flat EBITDA margins on low-single digit organic revenue growth in 2014, driven by the expectation that these trends will persist. Any margin expansion will likely be linked to growth at Movianto and the integration of Medical Action Industries.
--Cash flows are consistent and sufficient to fund OMI's moderately elevated capex and its dividend. Fitch forecasts funds from operations (FFO) to be $160-$200 million per year over the ratings horizon. However, free cash flow may be constrained in 2014 due to the working capital required to on-board a large for-profit hospital customer.
--Though still in the early growth stages Fitch believes OMI's healthcare logistics business and international platform represent important strategic growth drivers and tactics for improving its positioning with its manufacturer customers/suppliers in the medium to longer term.
--OMI's liquidity profile is solid, consisting of $92 million of cash on hand at June 30, 2014 and an undrawn $350 million unsecured revolver due June 2017. Subsequent to the aforementioned transactions, OMI will have no material debt maturities until 2021.
Moderate debt leverage, consistent and sufficient FFO, and a solid liquidity profile afford OMI good flexibility at its current 'BBB-' ratings. Maintenance of OMI's current 'BBB-' rating will require debt leverage generally maintained at or below 2.5x with FFO of at least $120 million. OMI's target leverage is 2.0x, which is in line with ratings in the triple-B range.
OMI's current credit metrics and stable performance could support positive ratings momentum over the ratings horizon. However, some margin and cash flow pressures in 2013-2015 and management stated willingness to increase leverage for M&A constrain the ratings somewhat. Fitch may consider a ratings upgrade in the medium term with evidence of sustainable margin and cash flow improvements. In the meantime, Fitch believes the current 'BBB-' ratings provide OMI flexibility to consummate appropriate and targeted M&A.
M&A that causes leverage to increase to 3.0x-3.5x, in line with OMI's core competencies, could be appropriate at the current 'BBB-' ratings, if accompanied by the ability and a commitment to de-lever within 12-18 months. A downgrade is unlikely to result from operational or competitive pressures over the ratings horizon. But a downgrade could result from an otherwise transformational acquisition or from a shift away from OMI's historically conservative financial management strategy.
Fitch currently rates OMI as follows:
--Long-term Issuer Default Rating 'BBB-';
--Senior unsecured bank facility 'BBB-';
--Senior unsecured notes 'BBB-'.
The Rating Outlook is Stable.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology: Including Short-term Ratings and Parent and Subsidiary Linkage' (May 28, 2014);
--'Fitch Affirms Owens & Minor at 'BBB-'; Outlook Stable' (April 8, 2014);
--'2014 Outlook: U.S. Healthcare - Secular Challenges Require a Compelling Value Proposition' (Nov. 25, 2013).
Applicable Criteria and Related Research:
Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage
2014 Outlook: U.S. Healthcare [[ Secular Challenges Require a Compelling Value Proposition