S&P Downgrades Stryker (SYK) to 'A' Following Recent Acquisitions

Standard & Poor's Ratings Services lowered its ratings on Stryker Corp. (NYSE: SYK), including the corporate credit and issue-level ratings to 'A' from 'A+'. We also lowered the short-term rating to 'A-1' from 'A-1+'.

At the same time, we removed the ratings from CreditWatch, where we placed them with negative implications on Feb. 1, 2016. The outlook is stable.

"The downgrade reflects our view that the modest improvements to Stryker's scale, product diversity, and growth profile from the acquisition of Sage Products Holdings III [a manufacturer of medical supplies focused mainly on reducing hospital-acquired infections] and Physio-Control International Inc. [a U.S.-based manufacturer of manual and automated external defibrillators] are more than offset by the material increase in debt leverage," said Standard & Poor's credit analyst David Kaplan.

These acquisitions have attractive growth rates and we expect Stryker to accelerate that growth by cross-selling these products to its existing hospital and ambulance-service customers, enabling the company to maintain total organic revenue growth in the mid-single-digit range.

Our stable outlook on Stryker anticipates mid-single-digit organic revenue growth and a moderate level of acquisitions as well as modestly improving margins, helped by subsiding litigation expenses. We expect Stryker to pursue niche-filling acquisitions at a pace that allows it to expand its portfolio while maintaining a modest financial risk profile, with adjusted debt leverage in the 1.5x to 2x range.

We could lower our rating if Stryker pursues significant debt-financed acquisitions, incurs litigation charges substantially above our expectations, or repurchases shares, such that net leverage would rise above 2x, and remain there on a sustained basis. This would involve at least 200 bps of margin compression.

We could raise the ratings if the company reduces leverage to below 1.5x, provided we believe the company remained committed to sustain that leverage. This could occur if the company returns to its historically conservative capital structure and modest pace of acquisitions.

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