Fitch Affirms Boston Scientific's IDR at 'BBB-'; Outlook Stable

CHICAGO--()--Fitch Ratings has affirmed Boston Scientific Corp.'s (NYSE: BSX) long-term Issuer Default Rating (IDR) at 'BBB-'. The Rating Outlook is Stable. A full list of BSX's ratings follows at the end of this release. The rating action applies to approximately $5.7 billion of debt.

KEY RATING DRIVERS

--Fitch believes that Boston Scientific (BSX) is on-target with its integration of AMS Men's Health businesses (AMS).

--BSX continues to make progress in reducing its litigation risk, but meaningful product liability remains in the near- to intermediate term.

--Fitch expects the company's improving operating profile will generate positive free cash flow (FCF), although legal settlements will moderate it in the near term.

--BSX's Implantable Cardioverter Defibrillator (ICD) and drug-eluting stent (DES) segments have stabilized with the prospects of generating low- to mid-single-digit growth during the intermediate term.

--BSX's remaining business segments, which generate roughly 49% of BSX's total firm sales are expected to deliver, in the aggregate, mid-single-digit growth.

--Fitch forecasts that after paying down roughly $250 million in T/L borrowings during 2016, BSX will focus cash deployment on targeted acquisitions in areas that offer innovation and growth.

AMS Integration on Schedule: Boston Scientific appears to be making good progress in integrating AMS. BSX acquired Endo International plc's AMS in August 2015. The company paid roughly $1.7 billion cash up front and potentially will pay $50 million earn-outs in 2017 if AMS' sales in 2016 are greater than $500 million (2014 sales: $396 million). BSX financed the transaction with the issuance of $1.6 billion of new debt. Fitch estimated pro forma leverage immediately following the transaction increased to significantly above 2.6x but expects it to decline to below 2.5x by year-end 2016, through a combination of increased EBITDA and debt reduction.

Declining Litigation Risk: BSX continues to make progress in resolving litigation issues, resulting in an improved litigation risk profile compared to five years ago. However, some financial risk related to other litigation remains, and the company will need to plan accordingly for any potential settlements, as it sets its priorities for cash deployment. The Pelvic Mesh litigation and its disputes with the IRS, in particular, may result in cash settlements/judgments. Fitch's affirmation assumes BSX will incur material cash settlements.

Positive but Stressed FCF: BSX generated $353 million of FCF during 2015, compared to approximately $1.010 billion during 2014. FCF in 2015 included the negative effect of $600 million litigation settlement payment to Johnson & Johnson. The expected improvement in sales and margins aided by continued cost controls and new product introductions should drive positive cash flow from operations. The net effect of manageable capital expenditure requirements for 2016 of roughly $350 million and likely legal settlements will weigh on forecasted FCF of roughly $600 million-$700 million. Nevertheless, Fitch believes BSX will prioritize FCF to debt reduction in the near term.

Steady ICD and DES Segments: Strengthening in the ICD and DES businesses has benefited from the stabilization of surgical procedures. Favorable comparisons of a multi-year period of soft procedure volumes resulting from the publication of negative clinical data identified in two large retrospective studies drove the improvement. BSX has and will continue to introduce new products into these two markets, offering the company a number of opportunities to increase share and revenue. Longer term, BSX's investment in emerging markets will likely support moderate but steady revenue growth.

Support from Remaining Segments: Neuromodulation, Peripheral Interventions, Urology and Electrophysiology are expected, taken together, to deliver at least mid-single-digit growth. These segments generate roughly 49% of BSX's total firm sales. The related surgical procedures in these segments are experiencing decent growth and not as highly priced as the CRM and DES segments. Given the relatively smaller dollars at stake for these segments (relative to CRM and DES), payers do not appear as focused on price. Fitch expects BSX will continue to launch new products in these respective markets. In addition, the company will likely expand its presence in emerging markets.

Cash Prioritized for Growth: Aside from paying down a moderate amount of debt during 2016, Fitch expects BSX will focus cash deployment on targeted acquisitions in areas that offer innovation and growth. Secondly, the company will likely consider further share repurchases in lieu of debt reduction once it returns to a leverage ratio of 2.5x or lower, assuming its operating profile continues to improve.

KEY ASSUMPTIONS

Fitch's key assumptions within for our 'BBB-'/Stable Outlook rating case for BSX include:

--Mid-single-digit growth with CRM & DES recovering, AMS acquisition revenue, and other segments generating strong single-digit growth.

--EBITDA margin gradually improving during the forecast period driven by favorable mix, operating efficiencies and synergies from integration of AMS acquisition.

--Positive but strained FCF in the near term, as legal settlements more than offset improving revenue and margins.

--Total debt/EBITDA declining to or below 2.5x by year-end 2016, through increased operational EBITDA and modest debt reduction.

--No share repurchases likely until late 2016/early 2017.

--Targeted acquisitions in 2016 and then increasing during forecast period assuming BSX attains the deleveraging goal.

RATING SENSITIVITIES

Positive: Future developments that may individually or collectively, lead to positive rating action include the following:

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

--An operational profile that could lead to significant and durable increases in FCF;

--Cash deployment policy and resulting capital structure that would durably sustain leverage below 2.2x-2.3x.

Negative: Future developments that may, individually or collectively, lead to negative rating action include the following:

--Material and lasting deterioration in operations and FCF;

--Persistent increase in leverage approaching 3.0x;

--Leveraging acquisitions without the prospect of timely debt/leverage reduction;

--Large legal settlement(s) that would need to be funded with significant debt issuance(s).

LIQUIDITY

Adequate but Moderately Reduced Liquidity in the Short Term: BSX's potential legal settlements during 2015-2017 will moderately reduce liquidity in the short term. Nevertheless, Fitch expects that BSX will maintain adequate liquidity provided by positive FCF and access to the credit markets. FCF for the latest 12-month period (LTM) ending Dec. 31, 2015 was approximately $353 million (including a $600 million cash litigation-settlement payment to Johnson & Johnson).

At the end of the period, BSX had roughly $319 million in cash/short-term investments, full availability on its $2 billion revolver (maturing on April 10, 2020), and full availability on its $300 million U.S. receivables securitization facility. The company had approximately $5.7 billion in debt, with roughly $335 million maturing in 2017, $990 million in 2018, $150 million in 2019, and $1.83 billion in 2020. Fitch anticipates that BSX will refinance most of its maturities with debt rather than pay them down.

FULL LIST OF RATING ACTIONS

Boston Scientific Corp

Fitch has affirmed the following ratings for BSX:

--Long-term IDR at 'BBB-' with a Stable Outlook;

--Unsecured bank credit facility at 'BBB-';

--Senior unsecured notes at 'BBB-'.

Additional information is available on www.fitchratings.com

Summary of Financial Statement Adjustments - Fitch has made no material adjustments that are not disclosed within the company's public filings.

Applicable Criteria

Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 17 Aug 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869362

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1003069

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https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1003069

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Contacts

Fitch Ratings
Primary Analyst
Bob Kirby
Director
+1-312-368-3147
Fitch Ratings, Inc.
70 W. Madison St.
Chicago, IL 60602
or
Secondary Analyst
Megan Neuburger
Managing Director
+1-212-908-0501
or
Committee Chairperson
Bill Densmore
Senior Director
+1-312-368-3125
or
Media Relations:
Alyssa Castelli, New York, +1 212-908-0540
Email: alyssa.castelli@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Bob Kirby
Director
+1-312-368-3147
Fitch Ratings, Inc.
70 W. Madison St.
Chicago, IL 60602
or
Secondary Analyst
Megan Neuburger
Managing Director
+1-212-908-0501
or
Committee Chairperson
Bill Densmore
Senior Director
+1-312-368-3125
or
Media Relations:
Alyssa Castelli, New York, +1 212-908-0540
Email: alyssa.castelli@fitchratings.com