Tough competition in the contact lens-care products (CLCP) and ophthalmic surgical products sectors, along with a changing U.S. market for contact lens solutions, are strong factors impacting Advanced Medical Optics' (AMO) debut bank facilities, according to ratings agencies looking at the deal. The $140 million in senior secured bank debt, split between a $40 million, five-year revolver and a six-year, $100 million term loan, has been rated B1 by Moody's Investors Service, while Standard & Poor's views the bank debt a notch higher at BB-. The bank deal, launched last week week by Merrill Lynch and Bank of America, and $175 million in senior subordinated notes, backs the spin-off of AMO from Allergan (LMW, 6/3).
Explaining the changing dynamics in the contact lens market, Russell Pomerantz, senior analyst at Moody's, said, "A shift in the market away from peroxide-based disinfection systems in the U.S. to multi-purpose solutions has impacted the CLCP business." Foreign exchange movements also have played a hand in decreasing performance, he noted, adding that competition is intense from Bausch & Lomb and Alcon. But AMO holds a top three position in a number of areas and has the second largest and growing market share in intraocular lenses.
The company does not have too many hard assets and, in a default scenario, the asset base would not cover the bank debt, said Pomerantz. But AMO does have strong cash flow, he added. Pricing on the five-year revolver is LIBOR plus 3% and the "B" is offering LIBOR plus 31Ž 2%. The spinoff into an independent company contributes to a positive outlook, and Moody's expects sales to stabilize and then improve modestly going forward. "The spin-off could enhance the ability to partner with other companies," Pomerantz noted. Additionally, divisions that spin off from within large companies often believe research and development improves, such as Sybron Dental Specialties, he commented. AMO is not contemplating acquisitions in the near term due to potential tax issues related to the spin-off, so excess cash flow will likely be used to reduce debt. After the spin-off, AMO will have debt to EBITDA ratio of 3.8 times.