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Rating Action: Moody's revises Stryker's outlook to stable, Baa1 senior unsecured rating affirmed
Global Credit Research - 07 Jan 2021
New York, January 07, 2021 -- Moody's Investors Service, ("Moody's") today affirmed Stryker's Baa1 senior unsecured and issuer ratings and its Prime-2 commercial paper rating. The outlook was revised to stable from negative.
The revision of the outlook to stable reflects reduced risk of a sustained increase in the company's leverage. As evidenced in recent months, when lock-down measures were lifted, patients returned to healthcare providers for elective procedures. This was evidenced by Stryker's solid year-over-year organic revenue growth of 3.3% in the third quarter, despite the ongoing pandemic. This supports Moody's view that elective procedures, such as large-joint replacements, may be deferred for some time, but that most will ultimately occur. That said, Moody's expects continued volatility in Stryker's results over at least the next few quarters, given the rising COVID case counts and hospitalization rates across the globe. However, longer-term demand for medical devices will rise due to continued medical innovations and demographic trends. The outlook revision also reflects demonstrated progress in key investment areas, such as strong growth in its Mako robotic platform over the course of 2020 despite the ongoing pandemic. The stable outlook also reflects Moody's expectations that the company will successfully integrate its $5.4 billion acquisition of Wright Medical, which closed in November 2020.
The affirmation of Stryker's Baa1 senior unsecured rating reflects Moody's expectations that Stryker will allocate a meaningful portion of free cash flow toward debt repayment following the acquisition of Wright Medical. Moody's expects Stryker's debt/EBITDA will trend toward 3 times in the next 12 to 24 months. Moody's expects Stryker will return to above industry average growth in revenue and EBITDA over time. The affirmation of the Prime-2 commercial paper rating reflects Stryker's excellent liquidity profile with meaningful cash balances and access to an undrawn long-term $1.5 billion revolving credit facility expiring in August 2023.
Rating Actions: Outlook Actions: Stryker Corporation
Outlook, Changed to Stable from Negative
Senior Unsecured Regular Bond/Debenture, Affirmed Baa1
Issuer Rating, Affirmed Baa1
Senior Unsecured Shelf, Affirmed (P)Baa1
Commercial Paper, Affirmed Prime-2
Stryker's Baa1 senior unsecured rating reflects its significant scale with revenues (pro-forma for Wright Medical) in excess of $15 billion. Stryker benefits from its position as one of the world's largest orthopedic companies as well as from its strong market positions in its Medical Surgery and Neurotechnology businesses. Moody's expects Stryker will sustain above-industry-average organic growth rates over time benefitting from its leading position in orthopedic robotics as well as continued international expansion where Stryker is currently underweight relative to peers. The company's orthopedic segment is exposed to deferrals of elective procedures, however certain parts of Stryker's business, such as its Medical segment, do not have the same degree of volatility. Stryker's ratings are constrained by its high appetite for M&A activity, as the Wright Medical acquisition follows around $2.5 billion of other M&A in the last two years.
Moody's regards the coronavirus outbreak as a social risk under its ESG framework, given the substantial implications for public health and safety. The pandemic has had a negative impact on Stryker's financial performance given the temporary deferral of elective medical procedures. From a governance standpoint, Stryker maintains conservative financial policies and the company is committed to maintaining an investment-grade profile though the company has been acquisitive.
The stable outlook reflects Moody's expectations that while the near-term trajectory of the coronavirus pandemic remains uncertain, Stryker will continue on a deleveraging path such that debt/EBITDA will approach 3 times over the next 12 to 24 months.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
The ratings could be downgraded if Moody's expects the impact of the coronavirus will lead to a steep and prolonged decline in demand for elective surgical procedures over the next 12 to 24 months. The ratings could also be downgraded if the company's liquidity profile erodes or if the company sustains an aggressive approach to M&A while leverage remains elevated following the Wright Medical acquisition. Ratings could be lowered if debt/EBITDA is unlikely to approach 3 times over the next 12 to 24 months.
Ratings could be upgraded if Stryker can sustain growth in the mid to high single digit range while sustaining debt/EBITDA below 2.5 times. Successful integration of Wright and maintenance of balanced financial policies could also support an upgrade.
Stryker Corporation, headquartered in Kalamazoo, Michigan, is a global manufacturer of a broad range of medical devices primarily used in orthopedic and medical surgical markets. These include endoscopic, instrumentation, and hospital bed product lines. Pro-forma for the Wright Medical acquisition, revenues exceed $15 billion.
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.
For 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.
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.
Scott Tuhy Senior Vice President Corporate Finance Group Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 Jessica Gladstone, CFA Associate Managing Director Corporate Finance Group JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 Releasing Office: Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653
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