Investing.com -- Moody's Ratings has affirmed the Ba1 long-term corporate family rating (CFR) and Ba1-PD probability of default rating (PDR) of Convatec Group PLC, a UK-based global provider of chronic care products. In addition, the Ba1 backed senior unsecured rating of the $500 million notes due 2029 issued by 180 Medical Inc., a fully-owned operating subsidiary of Convatec, was also affirmed. The outlook for both entities has been upgraded to positive from stable.
The rating affirmation and outlook upgrade are a result of solid organic revenue and margin growth backed by a successful transformation program and strong product pipeline, which exceeded the company's 2024 guidance. Convatec's focus on the chronic care market, which provides recurring revenue and supports strong long-term market growth expectations, also contributed to the rating actions.
The company's conservative financial policy, with a net leverage target of around 2x, and the expectation that Moody's adjusted gross debt to EBITDA will be below 2.5x over the next 12-18 months, further supported the positive rating action.
Convatec's transformation program, which addressed historical operational and performance issues, has resulted in good organic growth over the past few years. The company's focus on innovation and product mix, along with a strong pipeline of new product launches, are expected to support future organic growth and margin expansion. This is expected to improve credit metrics, with Moody's adjusted debt/EBITDA below 2.5x over the next 12-18 months.
The Ba1 CFR of Convatec is backed by its good scale and product diversification across multiple subsegments within chronic care. The company is well diversified geographically, but has less exposure to Asia. Convatec is a market leader in several product categories, which benefit from low demand cyclicality and stable annual market growth in the mid-single-digit percentage range. The company consistently generates positive free cash flow (FCF), which improved substantially in 2024 to $167 million from $29 million in 2022.
However, the company faces credit constraints including social risks from downward pricing pressure as healthcare payors seek to control costs, potential product litigation risks, relatively lower margins compared to some competitors, and risks around the execution of the company's product pipeline and expected efficiency gains.
Convatec has good liquidity, with a cash balance of $65 million as of December 31, 2024, and $566.5 million equivalent availability under its $950 million revolving credit facility (RCF), supporting its liquidity position.
The company's $500 million backed senior unsecured notes issued by 180 Medical Inc. rank equally with the loan facilities which are also unsecured and benefit from equivalent guarantees across the group. Hence, the notes are rated in line with Convatec's CFR at Ba1.
The positive outlook reflects the expectation that Convatec will continue to grow its revenue in the mid-single digit percentage range and expand its margin while delivering on its productivity and simplification initiatives. The outlook also assumes that the company will maintain good liquidity.
Upward rating pressure could occur if Convatec continues to enhance its scale and market positioning while growing its profit margins. An upgrade would also require Convatec to maintain conservative financial policies, including maintaining Moody's adjusted gross debt/EBITDA around 2.0x.
Downward pressure on the rating could develop if operating performance deteriorates, Moody's adjusted gross debt/EBITDA increases above 3.0x, or a more aggressive financial policy is pursued, including not adhering to its stated leverage policy.
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