Acelity L.P. Inc. Upgraded To 'B+' On Improved Cash Flow; Outlook Positive On Announced IPO


Rating Action Overview

  • San Antonio-based wound-therapy company Acelity L.P. Inc. outperformed our 2018 expectations with strong cash flow generation in excess of $150 million and a reduction in leverage to 5.7x, helped by higher-than-expected revenue and improvements in working capital.
  • In addition, Acelity announced its intention for an IPO and filed an S-1 with the SEC. The company indicated that the primary proceeds will be used to repay debt. We expect the financial sponsor will gradually reduce its stake over time.
  • We are raising the issuer credit rating on Acelity to 'B+' from 'B' reflecting the company's improved operating performance and our expectation that Acelity will be able to withstand competitive pressures, maintaining its financial measures at the improved levels.
  • We are also raising the issue level ratings on the first-lien senior secured debt to 'B+' from 'B' and the ratings on the third-lien debt to 'B' from 'B-'.
  • The positive outlook reflects the potential for a higher rating if, following the IPO, the company adopts a more conservative financial policy and maintains its long-term leverage comfortably below 5x.
TORONTO (S&P Global Ratings) April 19, 2019—S&P Global Ratings today took the above listed rating actions. The upgrade reflects Acelity's improved 2018 credit measures and our expectation that it will maintain leverage below 5.5x and generate free operating cash flow (FOCF) in excess of $100 million per year. We believe the company will continue to leverage its market leadership position in the negative pressure wound therapy (NPWT) market in the U.S. We expect it to sustain credit measures at the improved level, helped by launches of improved versions of existing products, and as it focuses on faster growing markets and further penetrates the global market outside the U.S. to offset pricing pressure and reimbursement challenges. We also believe that Acelity's revenue, profitability, and cash flow will generally be less volatile than it was during the past two years.
The positive outlook reflects the potential for a higher rating if, following the IPO, the company adopts a more conservative financial policy and maintains its long-term leverage comfortably below 5x.
We could revise the outlook back to stable if the company does not successfully complete an IPO, which would remove the prospect for further deleveraging. We also could revise the outlook back to stable if, despite a successful IPO completion, Acelity experiences continued pricing pressure from intensified competition, challenges from declining reimbursement rates, disruption in its distribution channel, or other operational difficulties such that its free cash flow drops below $100 million level or leverage stays near or above 5x.
We could consider an upgrade if, as a result of the IPO, Acelity adopts a more conservative financial policy such that leverage declines comfortably below 5x while the company's FOCF generation remains robust, in excess of $100 million per year.
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