OREANDA-NEWS. Fitch Ratings has downgraded St. Jude Medical, Inc.'s (STJ/St. Jude) long-term ratings to 'A-' from 'A', and its short-term rating to 'F2' from 'F1'. The ratings are removed from Negative Rating Watch, and assigned a Stable Outlook. See the full list of rating actions at the end of this release.

Fitch has also assigned an 'A-' rating to the company's \\$1.5 billion notes offering, which will be used to partly fund its recently announced \\$3.4 billion cash acquisition of Thoratec Corporation (Thoratec).

KEY RATING DRIVERS
The rating actions reflect the following:

--Fitch believes the acquisition of Thoratec is strategically constructive and provides an adjacent product platform to STJ's cardiovascular business, as well as an expansion of its treatment offerings for heart failure patients.

--The acquisition will increase leverage (total debt/EBITDA) in the intermediate term, which was already stressed for the company's 'A' rating.

--The stabilizing domestic cardiac rhythm management (CRM) market, new product introductions, and emerging market opportunities should support mid-single-digit organic revenue growth for STJ during 2015 and beyond.

--STJ's focus on cost control and improving its sales mix should more than offset pricing headwinds and incrementally improve margins during 2015-2017.

--Decent sales growth and modestly improving margins will drive strong and consistently positive free cash flow (FCF).

--Fitch anticipates that STJ will maintain adequate liquidity through cash balances, reliably positive FCF and ready access to the credit markets.

THORATEC ACQUISITION STRATEGICALLY SOUND
STJ's decision to enter into the mechanical circulatory support market through the acquisition of Thoratec will help to expand the company's presence in treating heart failure patients. The demand for heart pumps should increase over time, given the increasing number of new heart failure patients. In addition, these devices can provide health and economic benefits to patients and payors, to the extent that they can more effectively and more safely treat patients than with alternative treatments.

Thoratec's device platforms are adjacent to STJ's current cardiovascular platforms. Potential sales and technological synergies exist between the two's product platforms. STJ forecasts only modest operating cost synergies, however, although it should also be able to augment the growth in Thoratec's products through its scale. Thoratec operates in the ventricular-assist heart pump market, which is a duopoly, and has a roughly 58% market share. In addition, Fitch expects Thoratec to enter what will most likely become a duopolistic percutaneous heart pump market in the near future.

TRANSACTION WILL INCREASE LEVERAGE
STJ expects to close the transaction in fourth quarter 2015 (4Q15), and leverage will likely increase above what is already a stressed balance sheet for similar 'A' rated issuers, precipitating Fitch's downgrade to 'A-'. Despite STJ's expected operating stability and acquisition-related opportunities to enhance growth, Fitch believes that leverage will remain above 1.7x during the intermediate term.

GROWTH EXPECTED
Fitch looks for STJ to generate mid-single-digit organic revenue growth during the next 12-24 months. Growth will be supported by new product introductions, growth in recently introduced products, and expansion into faster growing product and geographic markets. These factors should more than offset a soft CRM market and foreign exchange rate headwinds.

STJ has recently launched, or will soon launch devices in all four of its business segments (CRM, Atrial Fibrillation [AF], Cardiovascular [CV] and Neuromodulation [NM]). A number of these devices are differentiated by their clinical effectiveness and safety profiles, as well as by their ability to reduce medical costs compared to competing devices. Fitch believes the company's new product development and commercialization efforts will continue to support favorable pricing and potentially incremental market share gains.

IMPROVING MARGINS
Fitch forecasts improving margins for STJ, despite some persistent headwinds. STJ margins have remained relatively strong, owing to mix shift to newer and higher margin devices and its ongoing focus on cost control which offset a more challenging hospital reimbursement environment and the ACA excise tax. Longer term, Fitch expects margins will benefit from continued gains in operational efficiency and favorable shifts in product sales mix.

RELIABLE FCF
Increasing revenue with improving margins should result in STJ generating \\$800 million - \\$1.1 billion of annual FCF (cash flow from operations minus capital expenditures of roughly \\$250 million minus dividends of roughly \\$320 million) during the next two years. Cash generation should be sufficient to fund roughly \\$2.3 billion of debt reduction that will likely be needed to maintain the 'A-' rating if the acquisition is executed as announced.

KEY ASSUMPTIONS
Fitch's key assumptions within the rating case for St. Jude Medical, Inc. include:

--Mid-single-digit organic revenue growth;
--Stressed leverage in the intermediate term mainly due to the proposed Thoratec acquisition;
--Improving margins of 50-75 basis points by 2017 with consistently positive and solid FCF of \\$800 million - \\$.1 billion annually;
--Adequate liquidity from balance sheet cash and adequate access to the bank and credit markets;
--Roughly \\$2.3 billion in debt reduction within approximately two years of the acquisition.

RATING SENSITIVITIES
Positive: Future developments that may, individually or collectively, lead to positive rating action include the following:

An upgrade is not anticipated in the near- to intermediate-term. However, STJ would need to commit to and operate with leverage stronger than 1.6x-1.7x while maintaining relatively stable operations and solid FCF, in order for Fitch to consider a positive rating action.

Negative: Future developments that may, individually or collectively, lead to negative rating action include the following:

--Debt sustained above 2x-2.1x EBITDA without the prospect of timely deleveraging.
--Stressed leverage could result from a scenario in which revenue and margins are significantly stressed (more than Fitch anticipates), resulting in weakening FCF, and capital deployment not being adjusted to reduce the company's need for debt financing.
--As such, significant debt-financed share repurchases or acquisitions in the near term would likely prompt a negative rating action, given the limited flexibility associated with the company's forecasted leverage during the next two years.

LIQUIDITY
At July 4, 2015, STJ had adequate liquidity, comprising approximately \\$910 million in cash plus short-term marketable securities and roughly \\$251 million (net of \\$1.25 billion commercial paper [CP] borrowings) in availability on its \\$1.5 billion bank revolving credit facility, which expires in August 2020. STJ generated approximately \\$690 million in FCF (net of \\$179 million of capital expenditures and \\$312 million of dividends) during latest 12 months (LTM), ended July 4, 2015.

The company had approximately \\$3.75 billion in debt with (including \\$1.25 million in CP outstanding) approximately \\$52 million maturing in 2015, \\$675 million in 2016, \\$1.25 billion in 2018 and \\$1.77 billion thereafter. Fitch expects STJ to refinance the majority of its non-bank-loan maturities, utilizing its anticipated access to credit markets.

FULL LIST OF RATING ACTIONS

Fitch has downgraded the following ratings:

--Issuer Default Rating (IDR) to 'A-' from 'A';
--Senior unsecured bank debt to 'A-' from 'A';
--Senior unsecured debt to 'A-' from 'A';
--Short-term IDR to 'F2' from 'F1';
--Commercial paper to F2' from 'F1'.

The Rating Outlook is Stable.