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Rating Action:

Moody's upgrades Owens & Minor to B1 CFR; outlook positive

18 Feb 2021

New York, February 18, 2021 -- Moody's Investors Service, ("Moody's") upgraded the ratings of Owens & Minor, Inc., ("Owens & Minor ") including its Corporate Family Rating (CFR) to B1 from B2 and its Probability of Default Rating (PDR) to B1-PD from B2-PD. Moody's also upgraded the rating on the senior secured credit facilities and notes to B1 from B2. The Speculative Grade Liquidity Rating was upgraded to SGL-1 from SGL-2, signifying very good liquidity. The outlook remains positive.

The upgrade of the CFR and positive outlook reflects a material reduction in leverage following over $500 million of debt reduction inclusive of the proceeds from follow-on equity issuance in October 2020, and continued improvement in operating performance. Pro forma adjusted debt/EBITDA approximated 3.6x for the twelve months ended September 30, 2020, versus 6.0x for the twelve months ended June 30, 2020. Owens & Minor has benefitted from strong demand in the company's manufacturing business, which produces personal protective equipment (PPE) used to prevent the transmission of coronavirus and other infectious diseases. The company will continue to benefit from elevated demand for PPE over the next 12-18 months, which will support further deleveraging assuming solid business execution. The growing contribution of the manufacturing business, which has higher profit margins than the distribution business, is having a positive impact on the group's overall profitability. Moody's expect this trend to continue over the next 12-18 months.

Rating actions:

..Issuer: Owens & Minor, Inc.

.... Corporate Family Rating, upgraded to B1 from B2

.... Probability of Default Rating, upgraded to B1-PD from B2-PD

. Gtd. senior secured notes due 2024, upgraded to B1 (LGD3) from B2 (LGD3)

. Speculative Grade Liquidity rating, upgraded to SGL-1 from SGL-2

Outlook action:

Owens & Minor, Inc.

The outlook remains positive

Issuer: Owens & Minor Medical, Inc.

Senior Secured Revolving credit facility expiring 2022, upgraded to B1 (LGD3) from B2 (LGD3)

Gtd. Senior Secured term Loan B due 2025, upgraded to B1 (LGD3) from B2 (LGD3)

Outlook action:

Owens & Minor Medical, Inc.

The outlook remains positive

RATINGS RATIONALE

Owens & Minor's B1 CFR is constrained by moderate scale in the highly competitive medical distribution business and low margins overall despite an increasing contribution from its profitable manufacturing operations. Although manufacturing margins have improved due to the manufacturing throughput from PPE demand, as the pandemic wanes, sales growth and manufacturing margin on these products will likely moderate. Moody's expects that adjusted debt to EBITDA will continue to decline and remain in the 2.5x to 3.0x range over the next 12-18 months supported by further profitability improvement and debt reduction. With revenues of $8.3 billion in the twelve months ended September 30, 2020, Owens & Minor competes against significantly larger companies, such as Cardinal Health, Inc., which also has a more diversified product offering. The ratings are supported by Moody's view that the company will continue to expand its manufacturing business while sustaining positive free cash flow.

The Speculative Grade Liquidity Rating of SGL-1 reflects the company's very good liquidity, including ample headroom under its financial covenants, positive free cash flow after required debt amortization and access to external credit facilities. At September 30, 2020, Owens & Minor had unrestricted cash of $77 million. The company has recently repaid its 2021 notes and the term loan due in 2022. The $400 million revolving credit facility will expire in July 2022.

The positive outlook reflects Moody's expectation that financial leverage will improve to between 2.5x and 3.0x over the next 12 to 18 months as the company further grows its manufacturing business, stabilizes its core distribution business, and repays debt.

Owens & Minor has limited exposure to environmental risks. The coronavirus pandemic, which Moody's considers as a social risk, has materially affected Owens & Minor's performance by reducing demand for surgical equipment as a result of a decline in hospital procedures in 2020. However, this adverse impact was partly mitigated by a strong increase in demand for PPE that the company manufactures and distributes. With respect to governance, Owens & Minor has had several management changes within the last two years and therefore the current management team has a limited track record at Owens & Minor. Under the prior management team, the company pursued several leveraging acquisitions.

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

The ratings could be upgraded if the company is able to sustain organic revenue and margin growth in the manufacturing business, refinances its debt maturities due in 2022, and further reduce leverage. Specifically, if adjusted debt/EBITDA is expected to be sustained below 3.0x, Moody's could upgrade the ratings.

The ratings could be downgraded if liquidity deteriorates from current levels, if the company experiences margin pressure, or if cash flow weakens. Specifically, if adjusted debt/EBITDA is sustained above 4.0x Moody's could downgrade the ratings.

Owens & Minor, headquartered in Mechanicsville, VA, is a nationwide provider of distribution and logistics services to the healthcare industry. Owens & Minor operates two divisions: Global Solutions (85% of 2019 revenue) that includes a comprehensive portfolio of products and services to healthcare providers and manufacturers, and Global Products (15% of 2019 revenue) that manufactures and sources medical surgical products. In the twelve months to September 30, 2020, Owens & Minor had revenue of $8.3 billion.

The principal methodology used in these ratings was Distribution & Supply Chain Services Industry published in June 2018 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1121974. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

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_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.
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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