Ortho Clinical financial woes take toll on Carlyle lenders following $4B buyout

It's been a rough road for Ortho Clinical Diagnostics since the Carlyle Group ($CG) snatched up the medical diagnostics unit from Johnson & Johnson ($JNJ) in 2014, with earnings recently slumping to a 5-year low. But those numbers aren't just taking a toll on the company. They're also dragging down lenders that backed Carlyle's $4 billion buyout of Ortho Clinical.

Prices on the obligations that contributed to Carlyle's debt-heavy Ortho Clinical buy have dropped to new lows, Bloomberg reports, as Ortho Clinical struggles with staggering declines in revenue. Ortho Clinical announced last month that its earnings before interest, taxes, depreciation and amortization fell 14% to $104 million in the three months ended in Sept. 30, following an 18% drop in the same period a year earlier. As a result, the company's $1.3 billion of 6.625 percent bonds fell to 68.1 cents this week and a $2.2 billion term loan financing the spinoff fell to 87 cents on the dollar, according to the Bloomberg story.

Needless to say, this does not bode well for Carlyle, which had high hopes for its purchase of Ortho Clinical. Ortho Clinical said that once Carlyle took the reins, its EBITDA would climb to more than $600 million in two years, according to deal marketing documents seen by Bloomberg. But those numbers are starting to seem more like wishful thinking, as Ortho Clinical recently said that it expects it expects to fall short of its projected earnings for 2015 of about $450 million. For comparison's sake, the company brought in $592 million in 2011.

Ortho Clinical stumbled immediately following the Carlyle deal. The company disclosed its Q3 2014 earnings late, Bloomberg points out, blaming accounting issues after it spun off from J&J. In May 2015, the company's CFO Jeff Capello exited the company, with Charles Wagner stepping in as his replacement.

Still, Carlyle maintains that the strategy it used to buy Ortho Clinical has its advantages. Turning businesses into standalone companies "can be attractive in the right hands, particularly if the assets were ignored or under-invested in while under a corporate umbrella," the firm said last year in a healthcare outlook report.

And J&J seemed more than ready to pass on the baton. In March 2014, the company formally accepted Carlyle's bid for Ortho Clinical to focus on high-growth areas and cut costs. Ortho Clinical wasn't keeping pace with its larger rivals including Roche ($RHHBY) and Abbott ($ABT), and selling the business was "a result of our disciplined approach to portfolio management," J&J CEO Alex Gorsky said at the time a sale was announced.

- here's the Bloomberg story
- read the report (PDF)

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