TEXT-S&P rates Boston Luxembourg II

(The following statement was released by the rating agency) Overview

-- Private-equity company EQT VI Ltd. has completed its leveraged buyout of Germany-based health care group BSN Medical (BSN).

-- Boston Luxembourg II S.a.r.l., the parent company of BSN, raised EUR1,131 million of debt to finance the takeover.

-- We are assigning our 'B' long-term corporate credit rating to BSN.

-- The stable outlook reflects our view that BSN's scale and operating model should enable it to sustain its operating performance and cash flow generation.

Rating Action On Oct. 2, 2012, Standard & Poor's Ratings Services assigned its 'B' long-term corporate credit rating to Boston Luxembourg II S.a.r.l., the parent company of Germany-based health care group BSN Medical (collectively, BSN). The outlook is stable.

At the same time, we assigned our 'B+' issue rating to the following BSN loans and facilities:

-- $280 million (EUR225 million) senior secured term loan B1 (due 2019),

-- EUR454.5 million senior secured term loan B2 (due 2019),

-- A$72.18 million (EUR60 million) senior secured term loan B3 (due 2019),

-- EUR50 million revolving credit facility (due 2019), and

-- EUR125 million acquisition facility (due 2019).

The recovery rating on these facilities is '2', indicating our expectation of "substantial" (70%-90%) recovery in the event of a payment default. Rationale The ratings reflect our view of BSN's relatively aggressive capital structure following the leveraged buyout by private equity group EQT VI Ltd.

We assess BSN's financial risk profile as "highly leveraged" under our criteria. Based on the new capital structure, we estimate that BSN will have a Standard & Poor's-adjusted net debt-to-EBITDA ratio of about 9.7x by Dec. 31, 2013. Our adjusted debt estimate includes financial debt of EUR1,131 million; EUR553 million in the form of a shareholder loan; and about EUR42 million and EUR14 million of obligations under operating leases and pensions, respectively.

Although we view the shareholder loan as debt-like, we recognize its cash-preserving function. Excluding this debt-like instrument, BSN's financial risk profile would still be classed as "highly leveraged," with debt to EBITDA of about 6.1x by Dec. 31, 2013. However, we estimate that the group should be able to generate free operating cash flow (FOCF) of at least EUR50 million per year and that the embedded cash flow sweep in the proposed debt structure could gradually reduce the amount of debt that pays interest in cash.

Under our base-case scenario, we estimate BSN will achieve adjusted EBITDA of at least EUR178 million in 2012 and EUR185 million in 2013. This will cover annual cash interest payments of about EUR75 million-EUR77 million by 2.2x-2.3x, supported by positive FOCF.

We consider BSN's business risk profile to be "satisfactory" under our criteria. We base our view on BSN's leading position as a manufacturer of orthopedic, wound care, and compression therapy products. We view this section of the medical supplies market as niche, because of the relatively specialized, and in some cases custom-made, products. Although they play an important part in the treatment process, BSN's products generally account for only a fraction of the cost of treatment. As such, we consider that these products should be more resilient to cuts in health care spending and disposable income.

In our opinion, BSN's well-established brands and its consequent ability to charge premium prices are reflected in a relatively strong operating margin of about 25%.

These strengths are partially offset, in our view, by BSN's exposure to changes in reimbursement policies; reimbursed products account for most of BSN's revenues. We anticipate that austerity measures and cuts in public funding will put prices under pressure for the rest of 2012 and 2013 in Europe. It could prove difficult to implement any proposed price increases. In addition, exposure to commodity prices, which can be volatile, may squeeze margins. Liquidity We consider BSN's liquidity under the new capital structure to be "adequate." We base our liquidity assessment on the following factors:

-- We estimate that BSN's liquidity sources (including cash, funds from operations, and the available credit facility) over the next 12 months should comfortably exceed its uses by more than 1.2x. Even if EBITDA were to decline by 15%-20%, we anticipate that net sources would remain positive.

-- The company's debt is long term. It comprises senior term loans amounting to EUR740 million due 2019 and EUR392 million of mezzanine debt due 2020.

-- We consider that the group should be able to generate cash flow from operations of at least EUR70 million per year, covering estimated capital expenditure (capex) of about EUR20 million per year.

-- The group also has access to additional sources of liquidity in the form of a senior revolving credit facility (RCF) of EUR50 million and a capex facility of EUR75 million.

-- We expect the group to be able to maintain adequate headroom under its financial covenants.

-- We do not anticipate any cash dividends or returns to shareholders.

Recovery analysis The issue rating on the $280 million (EUR225 million) senior secured term loan B1 (due 2019), EUR454.5 million senior secured term loan B2 (due 2019) and A$72.18 million (EUR60 million) senior secured term loan B3 (due 2019), EUR50 million revolving credit facility (due 2019), and EUR125 million acquisition facility (due 2019) is 'B+', one notch higher than the corporate credit rating on BSN. The recovery rating on these facilities is '2', indicating our expectation of substantial (70%-90%) recovery in the event of a payment default. A holding company, Lux DebtCo, will issue the senior secured facilities, as well as a EUR391.5 million mezzanine facility.

The issue and recovery ratings reflect our valuation of BSN Medical as a going concern, underpinned by its robust market positions, resilient business model, and favorable industry trends. The ratings also reflect our view of the bank facilities' relatively good security and guarantee package, as well as the group's potential exposure to the Luxembourg and German insolvency regimes, which we consider to be favorable for secured creditors.

We understand that the secured lenders benefit from a relatively comprehensive guarantee and security package. According to the senior facilities agreement, the guarantors are expected to represent at least 80% of the group's consolidated EBITDA and gross assets. In addition, the security package includes pledges on shares and substantially all the material assets of the guarantors.

According to the intercreditor agreement, we understand that all the senior secured facilities rank pari passu, but the EUR391.5 million mezzanine facility is subordinated.

The senior secured bank facilities benefit from a package of maintenance financial covenants. The documentation contains a limitation on dividend payments.

To calculate recoveries, we simulate a hypothetical payment default. We value BSN on a going-concern basis. Given the stable nature of the group's business, the competitive nature of the health care markets, and reliance on bank financing, we expect that default would most likely result from a decrease in revenues, combined with excessive leverage. Our simulated default scenario assumes a combination of the following factors:

-- Declining revenues as competition from other branded manufacturers and nonbranded generic products intensifies and prevents price increases.

-- Unfavorable changes in reimbursement regimes, especially in Europe, where health care systems are under increasing pressure to cut costs.

-- Falling margins as inflation increases the cost of raw materials.

-- Rising interest rates to cover potential increases in market rates, and renegotiation of conditions with banks due to a potential breach of covenants (especially given the various covenants).

-- Payment default in 2015, as high leverage makes the group unable to service interest and lowers long-term prospects in terms of growth and margins, preventing the group from receiving support from the banks or accessing the bond markets.

In addition, we assume that the RCF and acquisition facilities are both fully drawn at the point of default. Under our hypothetical scenario, we project a payment default in 2015, at which point EBITDA would have declined to approximately EUR141 million. Our going-concern valuation yields a stressed enterprise value of approximately EUR847 million, which is equivalent to 6x stressed EBITDA.

After deducting priority liabilities of EUR127 million, comprising mostly enforcement costs and finance leases, we arrive at a net stressed enterprise value of EUR720 million. We assume that the senior secured facilities would amount to EUR901 million at default, including six months of prepetition interest and a fully drawn RCF and acquisition facility. On this basis, recovery prospects for senior secured lenders would be in the 70%-90% range, which translates into a recovery rating of '2'.

While it was not part of our default scenario, we will revisit our analysis should the EUR150 million accordion feature on the acquisition facility be exercised.


The stable outlook reflects our view that BSN will sustain positive underlying revenue growth while at least maintaining its operating performance momentum, despite the potentially negative effects of governments' public spending cuts to health care. Moreover, maintaining the rating depends on the group upholding a financial profile commensurate with the rating. We view adjusted EBITDA cash interest coverage of about 2x and positive cash flow generation as commensurate with the 'B' rating.

We could take a negative rating action if adjusted EBITDA interest coverage were to drop below 2x, or if BSN proves unable to generate positive FOCF. This would most likely be caused by deteriorating operating margins due to an inability to innovate and pass on price increases, or by higher-than-expected increases in interest rates.

In our opinion, a positive rating action is unlikely over the next 12-18 months due to BSN's high adjusted leverage. However, we would take a positive rating action should the group demonstrate that it can achieve and maintain EBITDA cash interest coverage of above 3x and generate FOCF above EUR70 million per year.

Related Criteria And Research All articles listed below are available on RatingsDirect on the Global Credit Portal.

-- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008

-- Methodology: Business Risk/Financial Risk Matrix Expanded, Sept. 18, 2012

-- Methodology And Assumptions: Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011

-- Criteria Guidelines For Recovery Ratings On Global Industrials Issuers' Speculative-Grade Debt, Aug. 10, 2009

Ratings List New Rating; CreditWatch/Outlook Action Boston Luxembourg II S.a.r.l. Corporate Credit Rating B/Stable/-- LuxDebtCo.* Senior Secured

A$72.18 mil var rate B3 bank ln due B+

08/09/2019 Recovery Rating 2

EUR125 mil var rate ACF bank ln due B+

03/09/2019 Recovery Rating 2

US$280 mil var rate B1 bank ln due B+

08/09/2019 Recovery Rating 2

EUR50 mil var rate RCF due 2019 bank ln B+

Recovery Rating 2

EUR454.5 mil var rate B2 bank ln due B+

08/09/2019 Recovery Rating 2

*All debt issued by LuxDebtCo is guaranteed by Boston Luxembourg II S.a.r.l.

Complete ratings information is available to subscribers of RatingsDirect on the Global Credit Portal at

. All ratings affected by this rating action can be found on Standard & Poor's public Web site at . Use the Ratings search box located in the left column. (New York Ratings Team)

((e-mail: pam.niimi@thomsonreuters.com; Reuters Messaging: pam.niimi.reuters.com@reuters.net; Tel:1-646-223-6330;))