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Investing.com -- S&P Global Ratings has revised its outlook for Owens & Minor Inc . (NYSE:OMI) from stable to negative due to higher-than-expected leverage. The company’s existing ratings have been affirmed, and its new debt has been rated.
Owens & Minor is issuing $1.4 billion of new senior secured debt due 2030, broken down into term loan and note tranches. The company plans to use the funds from this issuance to finance the Rotech acquisition.
The company’s leverage was higher than expected at 4.4x in 2024, and it is anticipated to surge over 5x in 2025 due to the acquisition. However, it is expected to fall back below the 4.5x downgrade threshold in 2026.
The negative outlook reflects the expectation that Owens & Minor’s leverage will likely stay above the 4.5x downgrade threshold over the next year. It also indicates uncertainty regarding the potential sale of the PHS business and whether it will decrease leverage enough to counterbalance the reduced scope and diversity of the business.
The company’s underperformance in 2024 and the expected increase in leverage due to the Rotech acquisition led to the outlook revision. Owens & Minor ended 2024 with a leverage of 4.4x, higher than the expected 3.6x. This gives the company less cushion to handle the Rotech financing, leading to an expectation that its leverage will be considerably above the 4.5x downgrade threshold in 2025.
The potential sale of the company’s Products and Healthcare Services (NASDAQ:HCSG) (PHS) segment could result in a less favorable assessment of its business risk. The home health market, which is growing faster than OMI’s PHS business, is highly competitive and carries reimbursement risks.
The company’s new senior secured term loan was given a ‘BB-’ issue-level rating. If Owens & Minor sells the PHS business, the leverage threshold at the ‘BB-’ rating could be changed to 4x, in line with key peer AdaptHealth (NASDAQ:AHCO) Corp.
The Rotech acquisition is not viewed as a change in financial policy. However, further acquisitions while leverage remains high, or significant share repurchases, could lead to a change in assessment. Owens & Minor has made three acquisitions in the home health space since 2017. The company recently announced a $100 million share repurchase policy.
S&P Global Ratings could lower its rating on Owens & Minor if it expects the company’s leverage to remain above 4.5x on a sustained basis. This could occur if there is a significant underperformance in its base business, or integration challenges with the Rotech acquisition, or if the company becomes more aggressive with its financial policy and focuses on shareholder-rewarding activities or additional acquisitions instead of debt repayment.
The outlook could be revised to stable if there are substantial improvements in both profitability and cash flow generation in 2025 or if the company sells the PHS segment at an attractive multiple.
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