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Rating Action:

Moody's downgrades Medical Depot Holdings, Inc.'s CFR to Caa2, outlook stable

28 Sep 2022

New York, September 28, 2022 -- Moody's Investors Service ("Moody's") downgraded Medical Depot Holdings, Inc.'s (d/b/a Drive DeVilbiss Healthcare "Drive" or "Medical Depot") Corporate Family Rating (CFR) to Caa2 from Caa1 and Probability of Default Rating (PDR) to Caa2-PD from Caa1-PD. Moody's also downgraded the company's first lien credit facilities due in 2025 to Caa2 from Caa1 and downgraded the $4 million second lien term loan rating to Ca from Caa3. Moody's assigned a B2 rating to the new $55 million super senior secured term loan. The outlook is stable.

The rating action follows the addition of Drive's new $55 million super senior debt, which will be used to provide liquidity. The cash supplement should help manage the expected volatility in working capital during the second half of 2022. Governance risk is a factor in this rating action. While the transaction provided liquidity, it also added debt causing leverage and interest expense to increase.

The downgrade of Drive's ratings reflects Moody's view that the company will face ongoing volatility in working capital as it remains under pressure from supply chain issues and inventory availability. Drive continues to see margin compression due in part to some product mix shift coming out of Covid coupled with inflation. As a result, Moody's forecasts Drive will burn cash in 2022 and liquidity remains a concern despite the cash infusion provided from the new term loan.

In the stable outlook, Moody's expects that with the additional liquidity, the new term loan provides, the company will be able to execute on its operating improvement plans and overcome some of the supply chain shortfalls.

The following rating actions were taken:

Downgrades:

..Issuer: Medical Depot Holdings, Inc.

.... Corporate Family Rating, Downgraded to Caa2 from Caa1

.... Probability of Default Rating, Downgraded to Caa2-PD from Caa1-PD

.... Senior Secured 1st Lien Termed Out Revolver, Downgraded to Caa2 (LGD4) from Caa1 (LGD3)

.... Senior Secured 1st Lien Floating Rate Term Loan, Downgraded to Caa2 (LGD4) from Caa1 (LGD3)

.... Senior Secured 1st Lien Fixed Rate Term Loan, Downgraded to Caa2 (LGD4) from Caa1 (LGD3)

.... Senior Secured 2nd Lien Term Loan, Downgraded to Ca (LGD6) from Caa3 (LGD6)

Assignments:

..Issuer: Medical Depot Holdings, Inc.

.... Senior Secured 1st Lien Super Priority Term Loan, Assigned B2 (LGD2)

Outlook Actions:

..Issuer: Medical Depot Holdings, Inc.

.... Outlook, Remains Stable

RATINGS RATIONALE

Drive's Caa2 rating reflects its very high leverage with debt/EBITDA around 10 times as of June 30, 2022. Supply chain costs will pressure margins at least over the course of 2022, coupled with inflation and a mix shift away from some of the higher margin products. The company will face some headwinds to deleveraging, due to rising interest rates and that a meaningful portion of its interest costs are paid in kind.

Drive benefits from its credible market position in the durable medical equipment industry with approximately $1 billion of revenue. It is also well diversified by distribution channel and geography. Further, Moody's anticipates that there is still very strong demand for Drive's products despite the mix shift in products.

Moody's expects the company will maintain weak liquidity over the next 12-18 months. While liquidity is supported by about $100 million of cash pro forma for the transaction, there is no external revolving credit facility available. Moody's expects Drive will have negative free cash flow in 2022. There will likely be some quarter-to-quarter volatility due to swings in working capital, which will depend on the ongoing supply chain pressures.

The company has (unrated) receivable securitization facilities which provide for up to $100 million of advances in the United States and up to GBP 20 million in the United Kingdom. The US facility expires in May 2025 and the UK facility expires in November 2023 and will be current in late 2022. Moody's expects that these facilities will be substantially utilized. In view of the quality of underlying collateral we expect the company will be able to renew these facilities under reasonable terms.

The B2 on the super senior term loan reflects its priority position in the capital structure. The Caa2 ratings on the first lien senior secured credit facilities is the same as the Caa2 Corporate Family Rating as they represent the preponderance of debt in the company's capital structure. The obligations under the first lien facilities are secured by a first priority security interest in substantially all assets of the borrower, Medical Depot Holdings, Inc. and each subsidiary guarantor. The Ca rating on the company's $4 million second lien term loan reflects its junior position relative to the significant amount of first lien debt in the company's capital structure.

ESG considerations are material to Drive's credit rating. Drive's ESG credit impact score is very highly negative (CIS 5). The score reflects very highly negative governance risk considerations (G-5) which considers the company's aggressive financial policies and history of transactions that we deemed to be distressed exchanges. As a manufacturer and distributor of mobility and respiratory products, the company has a moderately negative exposure to social risk and in particular responsible production associated with regulatory oversight of its products. Medical Depot has experienced ongoing supply chain challenges, notably higher freight and raw material costs that have negatively impacted the company's operations, captured in the risks associated with demographic and societal trends.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

Ratings could be upgraded if the company's operating performance improves evidenced by EBITDA margin expansion. Improvement in liquidity and a reduced likelihood of default could support an upgrade.

Ratings could be downgraded if liquidity further erodes, operating performance deteriorates or the probability of default, including by way of a transaction that Moody's would deem a distressed exchange, were to rise.

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.

Based in Port Washington, New York, Medical Depot (d/b/a Drive DeVilbiss Healthcare) is a global manufacturer of durable and home medical equipment. The company manufactures and distributes mobility products (wheelchairs, canes, walkers and rollators), respiratory products (oxygen concentrators and nebulizers), specialty beds, bath and personal care products, and sleep apnea devices and other products. The company's products are principally sold to patients through homecare dealers, wholesalers, retailers, home shopping related businesses and e-commerce companies. Medical Depot is owned by private-equity firm Clayton, Dubilier & Rice ("CD&R"). Revenues are approximately $1 billion as of June 30, 2022.

REGULATORY DISCLOSURES

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 on https://ratings.moodys.com/rating-definitions.

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 issuer/deal page for the respective issuer on https://ratings.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 https://ratings.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://ratings.moodys.com/documents/PBC_1288235.

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 https://ratings.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 https://ratings.moodys.com.

Please see https://ratings.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 issuer/deal page on https://ratings.moodys.com for additional regulatory disclosures for each credit rating.

Jaime Johnson
Vice President - Senior Analyst
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

Ola Hannoun-Costa
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

No Related Data.
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