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BVI Holdings Mayfair Limited -- Moody's affirms BVI Medical's Caa1 CFR, Outlook negative

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Rating Action: Moody's affirms BVI Medical's Caa1 CFR, Outlook negativeGlobal Credit Research - 02 Sep 2022New York, September 02, 2022 -- Moody's Investors Service ("Moody's") affirmed BVI Medical, Inc.'s ("BVI") Caa1 Corporate Family Rating (CFR), Caa1-PD Probability of Default Rating (PDR) and the Caa1 rating on the company's senior secured first lien debt.The rating affirmation reflects improved liquidity as the company paid down its revolver borrowing through the proceeds from a new EUR 85 million 2nd lien term loan.Subsequent to this action, Moody's will withdraw the Corporate Family Rating (CFR) and Probability of Default Rating (PDR) from the borrowing entity (BVI Medical, Inc.). The CFR and PDR will move to the parent guarantor entity (BVI Holdings Mayfair Limited). Also, negative outlook will be assigned to the parent guarantor entity (BVI Holdings Mayfair Limited). This change places the CFR, PDR and outlook at the entity, which represents the entire credit group, and reports as such in the audited financial statements provided by the company. The change in location of the CFR does not signify any change in the company's credit profile or the creditworthiness of Moody's rated debt.The negative outlook reflects the company's very high leverage owing to disruptions caused by the coronavirus crisis, significant one-off expenses, and only gradual profit recovery. While freeing-up of revolver borrowing capacity is helpful, any deviation from current profit recovery expectations may raise the company's leverage and thus restrict its borrowing base to 35% of the total revolver amount to avoid testing of the covenants.Affirmations:..Issuer: BVI Medical, Inc..... Corporate Family Rating, Affirmed Caa1.... Probability of Default Rating, Affirmed Caa1-PD....Senior Secured 1st Lien revolving Credit Facility, Affirmed Caa1 (LGD3)....Senior Secured 1st Lien Term Loan, Affirmed Caa1 (LGD3)Assignments:..Issuer: BVI Holdings Mayfair Limited.... Corporate Family Rating, Assigned Caa1.... Probability of Default Rating, Assigned Caa1-PDOutlook Actions:..Issuer: BVI Medical, Inc.....Outlook, Changed To No Outlook From StableOutlook Actions:..Issuer: BVI Holdings Mayfair Limited....Outlook, Assigned NegativeRATINGS RATIONALEBVI's Caa1 CFR reflects the moderate scale of the company based on sales and narrow concentration within its chosen markets in ophthalmology. The rating also reflects Moody's expectations that debt/EBITDA will remain above 8 times for the next 12 to 18 months. The company faces headwinds due to one-off costs and upfront expenses for new product launches, at least in the next couple of quarters, making the recovery of the company's profits uncertain. However, in the longer term, Moody's anticipates that improving procedure volumes and lower costs will aid the company's operating performance. The company also competes against many larger peers who have significantly greater financial resources. The rating is supported by BVI's long-standing presence in the cataract surgery materials, equipment and intraocular lens (IOL) market, strong operating margins, and a diverse global customer base.The company's liquidity is weak -- with $34 million in cash at the end of 6/30/2022, a substantial portion of which may be required to cover the possible cash burn in the next 6-12 months. Moody's notes that the company has struggled to generate positive free cash flow in the last 3 years. At this time, the company does have access to almost the entire EUR 65 million revolver. However, if earnings remain subdued and the first lien net leverage ratio rises above the covenant level (8.6 times -- credit agreement calculation). the company's revolver borrowing base could become restricted to 35% of the total revolving capacity.ESG considerations have a very highly negative(CIS-5) impact on BVI's rating. BVI's credit exposure to environmental risk considerations is neutral-to-low(E-2) in line with the overall exposure of the medical product and device industry. BVI has highly negative(S-4) credit exposure to social risk considerations arising from responsible production including compliance with regulatory requirements for the safety of its products as well as adverse reputational risks arising from recalls associated with manufacturing defects. Many of the company's products are implanted inside the human eye and are exposed to severe regulatory actions and product liability litigations. BVI's credit exposure to governance risk considerations is very highly negative(G-5). The company's governance risks reflect its highly aggressive financial strategy and risk management as the company maintains very high leverage. In addition, the company has a board structure, which is dominated by members representing the company's private equity sponsor - TPG Capital.FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGSRatings could be upgraded if the company's operating performance recovers, resulting in EBITDA comparable to pre-pandemic levels and positive free cash flow. Quantitatively, ratings could be upgraded if BVI sustains debt/EBITDA below 8.0 times while maintaining a good liquidity profile.Ratings could be downgraded if elective vision procedures remain deferred beyond our current expectations, free cash flow remains negative for an extended period of time, or if liquidity erodes further.Headquartered in Waltham, Massachusetts, BVI Medical, Inc. (BVI) is a global manufacturer of products used in eye surgeries (primarily cataract procedures). BVI was acquired by private equity firm TPG Capital in August 2016. LTM revenues are approximately $325 million.The principal methodology used in these ratings was Medical Products and Devices published in October 2021 and available at https://ratings.moodys.com/api/rmc-documents/75796. Alternatively, please see the Rating Methodologies page on https://ratings.moodys.com for a copy of this methodology.REGULATORY DISCLOSURESFor further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. 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