S&P Assigns 'B+' Rating to Greatbatch (GB); Outlook Stable

Standard & Poor's Ratings Services assigned its 'B+' corporate credit rating to Greatbatch (NYSE: GB). The rating outlook is stable.

At the same time, we assigned a 'B+' issue-level rating to Greatbatch's $1.525 billion credit facility, which consists of a $200 million revolver, a $300 million term loan A, and a $1.025 billion secured term loan B. The senior secured recovery rating is '3', indicating our expectation of meaningful (50% to 70%, at the higher end of the range) recovery in the event of payment default.

We also assigned a 'B-' issue-level rating to Greatbatch's $435 million senior unsecured notes. The senior unsecured recovery rating is '6', indicating our expectation for negligible (0% to 10%) recovery in the event of payment default.

"Our rating on Greatbatch reflects our assessment of the company's business risk profile as 'fair' and the financial risk profile as 'aggressive'," said Standard & Poor's credit analyst David Kaplan. We applied a negative comparable rating modifier, to reflect the relative weakness within the fair business risk category.

Financial risk reflects our expectation that leverage will remain above 4x through 2016, and that even as the company prioritizes debt repayment from free cash flow, leverage may remain above 4x, depending on the pace of acquisitions. We estimate the ratio of funds from operation (FFO) to total debt (including our analytical adjustment and assumptions) of 12% for 2016 and 14% for 2017. Our financial risk profile incorporates the company's ability and commitment to reduce debt leverage. Still, we view the company's tolerance of leverage near 5x, and history of acquisition-driven growth, as constraining the financial risk assessment, at least in the near term. These ratios support our financial risk assessment of "aggressive".

Business risk is characterized by the company's competitive advantages derived from a market leadership position within the fragmented and somewhat-commodity-like industry of contract manufacturers (CMOs) servicing medical device companies. The company offers a broader array of manufacturing services than other smaller CMOs, has strong profitability, and like peers has sticky and long-term contracts and relationships with customers. Still compared to rated peers with a similar business risk we view the scope of the company's services as somewhat narrow, and having more limited barriers to entry and more price-based competition.

Our rating outlook on Greatbatch is stable, reflecting our expectation that leverage, while declining over the next year will likely remain above 4x, at least through 2016.

We could lower the rating, if the company fails to achieve synergies or experiences operational challenges in the integration of Lake Region, such that we would expect leverage to rise above 5x and remain at the level on a sustained basis. This could occur if EBITDA margins declined 400 basis points below our expectations. This could also occur if the company alienates customers through its efforts to design new products, which may compete with client products.

Although unlikely over the next year, we could raise the rating if the company reduces debt leverage to below 4x, providing we believe the company will sustain those credit measures. This could occur in 2017, if the company meets our forecast and prioritizes free cash flow for debt reduction.

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