Hill-Rom Holdings, Inc. -- Moody's changes Hill-Rom's outlook to stable from positive following plans to acquire Aspen Surgical; Baa3 affirmed

The change in outlook reflects Moody's belief that Hill-Rom's more aggressive approach to acquisitions and a tougher operating environment will make it less likely that the company will maintain credit ratios that would support an upgrade over the next 12 to 18 months.

Rating affirmed:

Hill-Rom Holdings, Inc.

Baa3 senior unsecured note rating

RATINGS RATIONALE

"Hill-Rom's leverage will rise significantly with this transaction, signaling a more aggressive growth strategy," said Diana Lee, a Moody's Senior Credit Officer. "This, combined with lower FY2012 guidance for sales and cash flow due to constrained spending on hospital beds, results in less upward pressure on the ratings," continued Lee.

Moody's estimates that Hill-Rom's debt/EBITDA will rise from about 0.8 times to the 1.5 to 2.0 times range, depending on how much debt was used to finance the Aspen Surgical transaction. Moody's does expect the company to deleverage so that credit ratios will be sustained at levels that are consistent with its Baa3 rating. Because of Hill-Rom's limited size and concentration in both acute and non-acute care products, credit metrics are expected to be stronger than those typical of other similarly rated healthcare companies.

Aspen's surgical consumable products will help Hill-Rom reduce its reliance on hospital bed sales, which are affected by capital spending constraints. However, hospitals will continue to see lower reimbursement and weak inpatient admissions growth, which will also result in pressure on both demand and pricing of medical surgical supplies and products. Aspen is a relatively small niche player and initial sales will account for less than 10% of Hill-Rom's total revenues.

The Baa3 rating reflects Hill-Rom's relatively small size, concentration in hospital bed and bedside products and a customer base that is facing challenges. These concerns are offset by relatively steady cash flows and solid credit metrics.

The stable outlook reflects our belief that in order to offset Hill-Rom's small size and concentration risk, solid credit metrics, including free cash flow to debt of at least 20% and debt/EBITDA below 1.5 times, will be maintained. An upgrade could be considered if the company returns to a more conservative growth strategy, is able to maintain moderate organic growth rates and solid margins and can sustain metrics that provide sufficient cushion to offset its small size and concentration (i.e. at a minimum, free cash flow to debt of greater than 25% and debt/EBITDA of less than 1.0 times). Further diversification of products could also help support an upgrade. If the company engages in additional debt-funded acquisitions or if growth rates and margins deteriorate materially, it could result in a downgrade. Sustained free cash flow to debt of less than 20% or debt/EBITDA above 1.5 times could also support a ratings downgrade.

Moody's expects Hill-Rom to maintain adequate liquidity over the next 12 months. However, the company has financed the Aspen transaction with a combination of cash, reported at about $220 million at June 30, 2012, and draws on its $500 million revolver, with $450 million available at June 30, 2012. Because the revolver expires in March 2013, Moody's expects the company to renew this facility well in advance of that date.

The principal methodology used in this rating was the Global Medical Products and Device Methodology published in October 2009. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

Hill-Rom Holdings is headquartered in Batesville, Indiana and is a leading manufacturer of hospital beds for acute care and post-acute care settings.

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Diana Lee VP - Senior Credit Officer Corporate Finance Group Moody'sInvestors Service, Inc.250 Greenwich StreetNew York, NY 10007 U.S.A. JOURNALISTS: 212-553-0376 SUBSCRIBERS: 212-553-1653Peter H. Abdill, CFA MD - Corporate Finance Corporate Finance Group JOURNALISTS: 212-553-0376 SUBSCRIBERS: 212-553-1653 Releasing Office: Moody's Investors Service, Inc.250 Greenwich StreetNew York, NY 10007 U.S.A. JOURNALISTS: 212-553-0376 SUBSCRIBERS: 212-553-1653(C) 2012 Moody's Investors Service, Inc. and/or its licensors and affiliates (collectively, "MOODY'S"). All rights reserved.

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