Zimmer Biomet Holdings Inc. Outlook Revised To Negative On COVID-19-Related Risks To Operating Performance

  • Zimmer Biomet Holdings Inc. reduced its 2019 leverage to 3.3x, creating some additional capacity for underperformance within the rating. At the same time, Zimmer's portfolio is highly exposed to elective procedures, which introduces a significant risk to its 2020 operating performance given the likely deferral of many nonurgent procedures.
  • We expect a large percentage of elective procedures, including elective orthopedic surgeries and many dental procedures in the U.S. and globally, to be deferred for at least a quarter or even longer, depending on the severity and duration of the pandemic.
  • While the company has the capacity within the rating to withstand a moderate EBITDA decline, a more severe and prolonged pandemic could materially affect the company's operating performance and significantly weaken its credit measures.
  • We are affirming our 'BBB' ratings on Zimmer Biomet Holdings and its senior unsecured debt. We are also revising the outlook to negative from stable.
  • The negative outlook reflects a risk that a severe and prolonged pandemic could materially affect Zimmer's operating performance and keep leverage above 3.75x for an extended period of time.
NEW YORK (S&P Global Ratings) March 25, 2020--S&P Global Ratings today took the rating actions listed above.
The outlook revision reflects our view that Zimmer Biomet Holdings Inc.'s high exposure to deferrable procedures introduces significant risk to its 2020 operating performance, now that the COVID-19 pandemic has spread globally. In February, Zimmer saw an 85%-90% reduction in elective procedures in China. In the U.S., the American College of Surgeons, the U.S. Surgeon General, and the Centers for Medicare and Medicaid Services (CMS) have recommended that health care providers nationwide delay elective procedures to avoid spreading the virus and to preserve protective equipment for emergency situations. We now expect a large percentage of elective procedures, including elective orthopedic surgeries and many dental procedures in the U.S. and globally, to be deferred for at least a quarter or even longer depending on the severity and duration of the pandemic. (For a recent report on the medical devices industry, please see "The Medical Devices Industry Outlook Is Stable On Strong Pipelines And Moderate M&A," published Feb. 20, 2020.)
The negative outlook reflects a risk that a severe and prolonged pandemic could materially affect Zimmer's operating performance and result in leverage sustained above 3.75x for a prolonged period of time.
We could lower the rating if Zimmer's leverage increases materially above 3.75x in 2020 and if there are limited prospects for improvement below 3.75x in 2021, most likely because of the prolonged delay in the elective procedures globally.
We could revise the outlook to stable if, despite the global headwinds, we become confident that the company will reduce leverage to, or below, 3.75x in 2021 as the current uncertainty regarding the coronavirus' impact on industry demand dissipates.
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