S&P Downgrades Zimmer Holdings (ZMH) to 'BBB'; Notes Leverage Increase on Biomet Deal

Standard & Poor's Ratings Services lowered its ratings on Zimmer Holdings (NYSE: ZMH), including the corporate credit rating and all issue-level ratings to 'BBB' from 'A-'. At the same time, we removed the ratings from CreditWatch, where we placed them with negative implications on April 24, 2014. The outlook is stable.

"The downgrade reflects our view that the strengthening of the business risk from the acquisition of Biomet is more than offset by the considerable increase in debt leverage," said credit analyst David Kaplan.

The stable outlook reflects prospects for modest revenue and EBITDA growth, and our expectation that Zimmer will operate its business with net debt in the 2x to 3x range over the next few years.

We could raise the ratings if the company reduces leverage to below 3x. This could occur sooner than 2017-2018, if performance materially exceeds our expectations.

Given the company's scale and diversity, we do not expect operational problems to result in a downgrade. Rather, higher-than-expected integration costs and weaker-than-expected revenue growth, combined with a redeployment of cash toward acquisitions or share repurchases could result in a downgrade. This combination of events would likely result in leverage at the high end of significant category, and operating performance that might be inconsistent with our strong business risk assessment. In this scenario we would likely view the company as weaker than its 'BBB' peer set.

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