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Ortho-Clinical Diagnostics SA -- Moody's upgrades Ortho-Clinical's CFR to B1; outlook is stable

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Rating Action: Moody's upgrades Ortho-Clinical's CFR to B1; outlook is stableGlobal Credit Research - 09 Feb 2021New York, February 09, 2021 -- Moody's Investors Service, ("Moody's") upgraded Ortho-Clinical Diagnostics SA's ("Ortho") Corporate Family Rating (CFR) to B1 from B3 and the Probability of Default Rating (PDR) to B1-PD from B3-PD. Moody's also upgraded the ratings on the senior secured credit facilities to Ba3 from B2 and the senior unsecured notes to B3 from Caa2. In addition, Moody's assigned a Speculative Grade Liquidity Rating of SGL-1. The outlook is stable.The B1 Corporate Family Rating reflects the repayment of approximately $1.4 billion in debt with net proceeds from the January 2021 IPO of Ortho Clinical Diagnostics Holdings plc. Moody's-adjusted Debt/EBITDA declined from approximately 8.0x as of December 31, 2020 to approximately 5.5x. Following the IPO, Moody's expects Ortho's financial policies will balance shareholder and creditor interests, and Moody's-adjusted debt to EBITDA will decline to the 4.5-5.0x range over the next 12-18 months. Some governance risks remain, however, as its private-equity owners still hold a majority of the outstanding shares. The B1 CFR also reflects Moody's expectations that the company's free cash flow generation will materially improve as a result of lower cash interest costs.The assignment of the SGL-1 Speculative Grade Liquidity Rating reflects Moody's expectations that Ortho will maintain very good liquidity. The company has in excess of $100 million of cash on hand and Moody's expects free cash flow will exceed $150 million in the next 12 months. The company also has access to a recently upsized $500 million revolver due 2026 which is largely undrawn outside of letters of credit. The company is subject only to a springing covenant on its revolving credit facility with ample headroom even if tested. Ratings upgraded: Ortho-Clinical Diagnostics SA Corporate Family Rating upgraded to B1 from B3Probability of Default Rating upgraded to B1-PD from B3-PDSenior secured bank credit facility to Ba3 (LGD3) from B2 (LDG3)Senior unsecured notes to B3 (LGD5) from Caa2 (LGD5)Rating assigned:Speculative Grade Liquidity Rating of SGL-1 Outlook action: Outlook, remains Stable RATINGS RATIONALE The B1 Corporate Family Rating reflects Ortho's high financial leverage, even after the deleveraging associated with the IPO. Moody's estimates that Ortho's pro forma debt to EBITDA was approximately 5.5x as of December 31, 2020. The rating also reflects the strong competitive nature of Ortho's two key businesses -- Clinical Laboratories and Transfusion Medicine -- in which Ortho competes against significantly larger and better capitalized competitors, like Abbott and Roche. The ratings are supported by Ortho's good diversity by customer, product and geography. The recurring nature of approximately 90% of the company's revenues that are generated from the sale of consumables and reagents provides a level of stability to Ortho's operations. In the longer-term, Ortho is positioned to grow earnings through achieving further cost efficiencies and increasing penetration in emerging markets.The stable outlook reflects Moody's expectation that Ortho's operating performance will be supported by low-to-mid single digit organic growth and some margin improvement over the next 12-18 months.Medical device companies face moderate environmental risk. However, they regularly encounter elevated elements of social risk, including responsible production as well as other social and demographic trends. Risks associated with responsible production include compliance with regulatory requirements for safety of medical devices as well as adverse reputational risks arising from recalls, safety issues or product liability litigation. Medical device companies will generally benefit from demographic trends, such as the aging of the populations in developed countries. That said, increasing utilization may pressure payors, including individuals, commercial insurers or governments to seek to limit use and/or reduce prices paid. Moody's believes the near-term risks to pricing are manageable, but rising pressures may evolve over a longer period.FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGSRatings could be upgraded if the company continues to demonstrate balanced financial policies and improving credit metrics. Quantitatively, ratings could be upgraded if debt/EBITDA is sustained below 4.5x.Ratings could be downgraded if financial policies become more aggressive or if the company's operating performance weakens. Quantitatively, ratings could be downgraded if debt/EBITDA is sustained above 5.5x.Ortho-Clinical Diagnostics produces in-vitro diagnostics equipment and associated assays and reagents. Ortho's largest segment, Clinical Laboratories, develops clinical chemistry and immunoassay tests, targeting primarily small and medium-sized hospitals. The company's Immunohematology products are used by blood banks and hospitals to determine patient-donor compatibility in blood transfusions. Ortho also develops and markets equipment and assays for blood and plasma screening for infectious diseases. The company's revenues are approximately $1.7 billion. Ortho is majority-owned by the Carlyle Group.The principal methodology used in these ratings was Medical Product and Device Industry published in June 2017 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1071635. Alternatively, please see the Rating Methodologies page on www.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. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1243406.At least one ESG consideration was material to the credit rating action(s) announced and described above.The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating. Jean-Yves Coupin Vice President - Senior Analyst Corporate Finance Group Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. 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