S&P Global Ratings downgraded Owens & Minor Inc.'s issuer credit rating to B from BB, with the outlook of the healthcare services company remaining negative.
The rating agency said Owens & Minor underperformed in comparison to the agency's projections in 2018 due to ongoing pricing pressure, competition and commodity headwinds, while carrying significant debt from the $710 million takeover of Halyard Healthcare Inc.'s surgical and infection prevention unit and the $380 million acquisition of Mediq BV's medical supplying unit Byram Healthcare.
S&P believes the healthcare services company's adjusted leverage will be above 5x over the coming years, compared with the previous sub-4x leverage expectation.
The agency believes Owens & Minor will have a limited recovery in its core medical-surgical distribution business in the near term as most pressure points are beyond the company's control. It sees the company as primarily a price taker due to its smaller scale compared with its integrated delivery network client base.
In addition, S&P said the Mechanicsville, Va.-based healthcare distributor is a market share donor because of aggressive pricing from competitors Cardinal Health Inc. and Medline Industries Inc. It believes leadership changes and the ongoing CEO search could also hurt the business due to its relationship-driven nature.
S&P believes Owens & Minor is structurally disadvantaged as it is under-penetrated in the lower-acute care settings and private-label product category versus its peers.
According to the agency, another key risk for Owens & Minor is its client concentration as it derives most of its revenue from hospitals that belong to three group purchasing organizations, namely Vizient Inc., Premier Inc. and Healthtrust Purchasing Group LP.
The rating agency stated that despite the weakening business profile, it believes the company is still a market leader in the acute-hospital med-surg distribution market with a market share of about 35% to 40%.
S&P said the negative outlook on Owens & Minor takes into account risks to its base case projection due to pricing pressure, management changes, high fixed-cost structure and uneven operating performance, along with the risk that the company may breach its financial covenant due to the step down in the leverage covenant in the third quarter of 2019.
This S&P Global Market Intelligence news article may contain information about credit ratings issued by S&P Global Ratings, a separately managed division of S&P Global Inc. Descriptions in this news article were not prepared by S&P Global Ratings. The original S&P Global Ratings documents referred to in this news brief can be found here.