S&P Lowers Medtronic (MDT) to 'A' Following Covidien Acquisition

Standard & Poor's Ratings Services today lowered its ratings on Minneapolis-based Medtronic Inc., including the corporate credit rating and all issue-level ratings to 'A' from 'AA-'. At the same time, we removed (NYSE: MDT) those ratings from CreditWatch, where we placed them with negative implications on June 16, 2014. The outlook is stable.

We also lowered the commercial paper rating to 'A-1' from 'A-1+'.

We subsequently withdrew our corporate credit rating of 'A' and short-term corporate credit rating of 'A-1' on Medtronic Inc., and assigned those ratings to the new Ireland-based holding company, Medtronic PLC.

"The downgrade reflects our view that the incremental strengthening of the business risk from the acquisition of Covidien is more than offset by the considerable increase in debt leverage," said Standard & Poor's credit analyst David Kaplan.

Post-merger Medtronic is a large, global provider of medical devices with a leading position in many high-margin medical product markets. The company's products treat cardiac rhythm disorders, cardiovascular disease, neurological disorders, spinal conditions and musculoskeletal trauma, urological and digestive disorders, diabetes, and ear, nose, and throat conditions. Additional product lines from Covidien include surgical solutions, respiratory and patient care, and vascular therapies.

The stable outlook reflects prospects for modest revenue and EBITDA growth, and our expectation that Medtronic will operate its business with net debt in the 2x to 3x range over the next few years.

We could raise the ratings if the company reduces leverage to below 2x, and we believe the company will gradually target operating at those levels.

Given the company's scale and diversity, we do not expect operational problems to result in a downgrade. Rather, a large debt-financed acquisition that would raise debt leverage to above 3x and lower funds from operations to debt to below 30% could result in a downgrade. We estimate Medtronic has about $5 billion in incremental debt capacity at the current rating.

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