OREANDA-NEWS. S&P Global Ratings today lowered its corporate credit rating on Integer Holdings Corp. to 'B' from 'B+'. The rating outlook is stable.

We lowered the issue-level rating on Integer's secured credit facility to 'B' from 'B+'. The recovery rating of '3' is unchanged and indicates our expectation of meaningful (50% to 70%, at the higher end of the range) recovery in the event of payment default.

We also lowered the issue-level rating on Integer's senior unsecured notes to 'CCC+' from 'B-'. The recovery rating of '6' is unchanged and indicates our expectation for negligible (0% to 10%) recovery in the event of payment default.

"The downgrade reflects the weak financial performance in recent quarters as well as our lowered expectations for 2016 and 2017, which weigh on credit metrics," said S&P Global Ratings credit analyst David Kaplan. It also reflects reduced confidence in management's visibility, and a change in our view on the degree of diversification and the company's exposure to earnings volatility.

More specifically, the company's financial performance has been negatively affected in recent quarters by weaker demand from certain medical device customers, stemming from delayed launches of new products, existing programs tapering off sooner than expected as those products are discontinued, and customers aggressively working down their inventory levels. The company was also hurt by very weak demand from customers in the energy sector (which represents less than 10% of revenues).

Our rating outlook on Integer is stable, reflecting our expectation that leverage will likely remain above 5x, at least through 2017, even as the company generates substantial free cash flow and prioritizes debt reduction.

We could lower the rating if the company fails to achieve synergies or experiences operational challenges in the integration of Lake Region, such that free cash flow falls below $25 million (excluding non-recurring adjustments). This could occur if EBITDA margins declined 400 basis points below our expectations due to integration challenges or intensified competition. This could also occur if the company alienates customers through its efforts to design new products, which may compete with client products.

Although unlikely over the next year, we could raise the rating if the company reduces debt leverage to below 5x, providing we believe the company will sustain those credit measures. This would likely involve the company successfully achieving planned cost synergies and expanding profit margins.