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Rating Action:

Moody's revises Zimmer Biomet's outlook to stable, Baa3 senior unsecured rating affirmed

10 Dec 2020

New York, December 10, 2020 -- Moody's Investors Service ("Moody's") today affirmed Zimmer Biomet Holdings, Inc.'s ("ZBH") Baa3 senior unsecured rating and revised the outlook 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 ZBH's return to modest year-over-year revenue growth in the third quarter, despite the continuing 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 ZBH's financial results over the next several 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 ZBH's Rosa robotic platform over the course of 2020 despite the ongoing pandemic.

The affirmation of ZBH's Baa3 senior unsecured rating reflects ZBH's very strong liquidity, with over $900 million in cash and full access to $2.5 billion of short and long term credit facilities. Even at current performance levels, the company is generating meaningfully positive free cash flow while investing in key growth initiatives. The affirmation also reflects Moody's expectations that the company will continue to exhibit conservative financial policies and low levels of leverage as the effects of the coronavirus pandemic subside.

Rating actions:

Outlook Actions:

..Issuer: Zimmer Biomet Holdings, Inc.

....Outlook, Changed To Stable From Negative

Affirmations:

..Issuer: Zimmer Biomet Holdings, Inc.

....Senior Unsecured Regular Bond/Debenture, Affirmed Baa3

....Senior Unsecured Shelf, Affirmed (P)Baa3

RATINGS RATIONALE

ZBH's Baa3 senior unsecured rating reflects its position as the world's largest stand-alone orthopedic company with pre-pandemic revenues of $8 billion. The company has a broad range of orthopedic products and a global presence. The company generates strong free cash flow and has demonstrated a commitment to debt repayment. ZBH's credit profile is constrained by its reliance on the orthopedic market for the significant majority of sales. The company is also constrained by ongoing quality and manufacturing remediation issues at its North Campus manufacturing facility in Warsaw, Indiana and an open FDA Warning Letter at this facility. These quality and remediation issues have pressured earnings, due largely to higher associated costs. Following several years of operational challenges, ZBH's execution had improved markedly prior to the onset of the coronavirus pandemic with a return to revenue growth, as well as the successful launch of its Rosa robotic platform.

The stable outlook reflects Moody's expectations that while the near-term trajectory of the coronavirus pandemic remains uncertain, ZBH will remain committed to low leverage levels and credit metrics will recover over the next 12 to 24 months.

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 ZBH's financial performance given the temporary deferral of elective medical procedures. From a governance standpoint, ZBH maintains conservative financial policies and the company is committed to maintaining an investment-grade profile.

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 financial policies become more aggressive. Ratings could be lowered if debt/EBITDA is unlikely to approach 3.25 times over the next 12 to 24 months.

Ratings could be upgraded if Zimmer demonstrates stability in EBITDA margins while sustaining debt/EBITDA below 2.75 times. An upgrade would also require that the company substantially resolves the FDA Warning Letter at its North Campus facility. Further, demonstrated market share stability, evidenced by low single digit revenue growth (in-line with the overall orthopedic market) could also support an upgrade.

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.

Headquartered in Warsaw, Indiana, Zimmer Biomet Holdings is one of the largest companies globally dedicated to musculoskeletal healthcare. The company specializes in the development of orthopedic implants for hips and knees, as well as spine and craniomaxillofacial, trauma, extremities, and dental markets. Revenues are approximately $8 billion.

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 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_1133569.

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.

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

No Related Data.
© 2021 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.

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MJKK or MSFJ (as applicable) hereby disclose that most issuers of debt securities (including corporate and municipal bonds, debentures, notes and commercial paper) and preferred stock rated by MJKK or MSFJ (as applicable) have, prior to assignment of any credit rating, agreed to pay to MJKK or MSFJ (as applicable) for credit ratings opinions and services rendered by it fees ranging from JPY125,000 to approximately JPY550,000,000.

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​
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