S&P Lowers Outlook on Boston Scientific (BSX) to Negative on Debt Issuance Plans

Standard & Poor's Ratings Services affirmed its ratings on Marlborough, Mass.-based Boston Scientific Corp., (NYSE: BSX) including its 'BBB-' corporate credit rating and senior unsecured rating. At the same time, we revised the outlook to negative.

Boston Scientific announced plans to issue $1.6 billion of debt to fund the acquisition of Endo International PLC's Men's Health And Prostrate Health businesses. This transaction increases the company's adjusted debt leverage (including accrued legal reserves as debt) to about 5x pro forma for the transaction.

"The company's willingness to allow leverage to rise to this level, even on a temporary basis, demonstrates a tolerance for debt leverage higher than we previously anticipated," said Standard & Poor's credit analyst David Kaplan. This, coupled with our belief that adjusted debt leverage will remain above 4x for at least 18 months is the basis for the revision of our financial risk assessment to "aggressive" from "significant".

Still, we believe the company is firmly committed to prioritizing deleveraging over the next two years, to get leverage back down to about 4x or lower. Our confidence in the company's commitment is supported by its strong free cash flow generation which makes that goal easily achievable in that time frame, and a long history of maintaining debt leverage of below 4x.

We expect 2014 adjusted net debt leverage of 4.8x (including legal reserves accrued under GAAP) to rise to about 5x at transaction close in mid-2015, and to then decline to about 4.7x for 2015, and to 4.0x for 2016, as the company scales back acquisitions and share repurchases to reduce debt leverage. We estimate the ratio of funds from operations (FFO) to debt, which was about 17% for 2014, will improve to about 18% for 2015, and 22% for 2016.

Our negative rating outlook on Boston Scientific reflects adjusted debt leverage (including accrued legal reserves as debt) and other credit metrics which are weak for the rating. Our rating hinges on the company's commitment to prioritizing deleveraging over next two years, and is supported by a long track record of maintaining leverage below 4x. The negative outlook also reflects downside risk to the expected trajectory of rapid deleveraging over the next two years.

We could lower the rating if we believe the company's commitment to deleveraging has weakened, if future legal expenses materially exceed our forecast, or if the company underperforms our expectations, such that we expect adjusted leverage to remain materially above 4x, for an extended period of time. This could lead us to remove the positive comparable rating modifier.

We could revise the outlook to stable once adjusted debt leverage declines to below 4.5x, providing we remain confident the company is committed to generally sustaining leverage near or below 4x.

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