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Rating Action:

MOODY'S AFFIRMS THE Ba3 RATING ON CONMED'S $135 MILLION EXPANSION OF ITS $100 MILLION GTD. SR. SEC. TERM LOAN; ALL OTHER RATINGS REMAIN UNCHANGED; RATING OUTLOOK IS STABLE

29 May 2003
MOODY'S AFFIRMS THE Ba3 RATING ON CONMED'S $135 MILLION EXPANSION OF ITS $100 MILLION GTD. SR. SEC. TERM LOAN; ALL OTHER RATINGS REMAIN UNCHANGED; RATING OUTLOOK IS STABLE

Approximately $450 million in Debt Securities Affected

New York, May 29, 2003 -- Moody's Investors Service affirmed the Ba3 rating on ConMed Corporation's ('ConMed's') $100 million guaranteed senior secured term loan, expanded by $135 million, citing the company's relatively high, albeit declining leverage and the competitive nature of the segments of the medical device industry in which it operates. The rating also reflects ConMed's strong position in a growing industry; and the stability of its cash flow. The company's other ratings remain unchanged. The outlook for all ratings is stable.

The table below summarizes these rating actions:

(i) Affirm the Ba3 rating on ConMed's $100 million Guaranteed Senior Secured Term Loan B due in 2009, now expanded by $135 million to $235 million;

(ii) Affirm ConMed's Senior Implied Rating of Ba3;

(iii) Affirm ConMed's Issuer Rating of B1;

(iv) Affirm the Ba3 rating on ConMed's $100.0 million Guaranteed Senior Secured Revolving Credit facility due 2007; and

(v) Affirm the B2 rating on ConMed's $115 million in 9% Guaranteed Senior Subordinated Notes due in 2008, followed by its withdrawal upon completion of the refinancing of the notes.

Moody's will withdraw its B2 rating on ConMed's subordinated debt once the debt's refinancing with the proceeds of the expanded Term Loan B is complete.

The rating agency noted that ConMed's product array of orthopedic devices benefits from demographic trends that include an aging yet more active population. This creates a need for orthopedic surgery, and the market for ConMed's instruments, in which ConMed holds a leading position. The disposable nature of much of its product line generates recurring revenues, and stable cashflows. In addition to the organic growth this engenders, ConMed has been making acquisitions, partly funded with debt, raising debt levels to approximately 45% of total capital.

The stable rating outlook reflects Moody's expectation that ConMed will continue to grow revenue and cash flows at a moderate, low- to mid-single digit rate, using its cash to fund capital expenditure and gradually reduce debt. It also reflects Moody's expectation that ConMed will continue to make relatively small, strategic acquisitions, reducing any temporary increase in debt needed for the purpose in the short term. If the company grows cash flows more rapidly than we expect, and uses the excess to retire debt, the company's outlook could become positive. ConMed has set its debt/total capitalization target at the 35-45% range, and is currently operating near the upper limit of that range. If it lowers its target, issuing equity to retire debt in order to achieve it, its outlook could also improve. Conversely, if competitive pressures further retard revenue and cash flow growth, or additional acquisition financing increases the company's debt burden materially, its outlook could turn negative.

In Moody's view, ConMed is relatively highly levered, compatible with its senior implied rating of Ba3. Total Debt/ Book Capitalization as of YE2002 was a relatively moderate 43%, but EBIT/Interest Expense was fairly low at 3.2x for the period. Retained Cash Flow/Debt, at 23% for FY2002, was appropriate for its rating category in this industry. Assuming that over the next year to eighteen months ConMed continues to grow revenues and cash flows at a mid-single digit rate, and that acquisitions remain relatively small, Moody's expects the company's Total Debt/Book Capitalization to decline to about 40% over the period and Retained Cash Flow/Debt to remain about the same. The current transaction, in which ConMed plans to retire its subordinated debt with the proceeds of an expanded Term Loan B, should marginally ($5.0 million) increase its debt burden while reducing its interest expense. EBIT/Interest Expense will, in Moody's view, improve modestly as a result.

ConMed faces intense competition from larger and better-capitalized companies in a number of its businesses, Moody's believes. Stryker (arthroscopy and powered surgical instruments), Tyco (electrosurgery, endoscopy and patient care), Johnson and Johnson (endoscopy), and 3M (patient care) all have significant positions in one or more of the sectors that ConMed serves. Competitive pressures have caused ConMed's gross margin to decline slightly but progressively, from 53% at YE1999 to 52.3% at YE2002. Although ConMed's acquisition of Bionx will add higher margin products to the company's mix, this is likely to slow rather than reverse the trend, in Moody's view, not least because the company plans to expand its sales force from 180 to 230 and convert them to independent status. A commission-paid sales force is both more effective and more expensive than a salaried one.

In 4Q2002, ConMed acquired ValMed (Portland, OR) and Nortrex (Montreal, Canada) for $3.0 million eoach. Together, they will form ConMed Integrated Systems, providing engineering design services to hospitals building operating rooms and intensive care units for endoscopic procedures. A number of ConMed's competitors have similar units. Having designed the hospital facilities, they are in an excellent position to bid on equipping them. ConMed is following suit to defend its market share. While its action is prompted by necessity, it exposes the company to the risks associated with entering into a new and very different business. Until now, ConMed has focused on manufacturing and distribution. Now, it will be providing consulting services. Again, the fact that it is willing to do so demonstrates the competitive nature of its markets.

Supporting ConMed's ratings are favorable industry trends. Moody's expects that, as the populations of developed countries age, they will need more surgical procedures. Their longer, more active lives, which give rise to more injuries and hence surgical interventions, only serve to accentuate the trend. Further, continued pressure to reduce healthcare costs has increased the demand for less invasive procedures, such as arthroscopy and endoscopy, which reduce the length of expensive hospital stays. Finally, concern with patient safety has augmented demand for disposables. Taken together, these trends bode well for continued growth in ConMed's markets, in Moody's opinion.

Lending further support to ConMed's ratings are the company's strong positions in the most important markets it serves. In arthroscopy, for example, ConMed is the second largest provider of the equipment necessary to perform minimally invasive procedures to visualize and repair joints; it has a 17% market share, behind Smith & Nephew with a 20% share. Its next largest competitor, Arthrex, has a 13% share. In the last two years, it has introduced 15 new arthroscopic products, many of which have unique features. An example is an autoclavable camera head, the only one on the market. Likewise, in the area of powered surgical instruments, ConMed is again the second largest operator, with a 20% market share, which compares with the 40% market share of the leader, Stryker.

Like many medical device manufacturers, ConMed has significant recurrent revenues thanks to its sales of disposables. Disposables accounted for 75% of total sales in 2002, a proportion that is likely to hold over the rating horizon, lending stability to its cash flows and hence additional support to its ratings.

Located in Utica, New York, ConMed Corporation is a medical device manufacturer specializing in instruments, implants and video equipment for arthroscopic sports medicine and powered surgical instruments, such as drills and saws, for orthopedic, neuro-surgery and other surgical specialities. In 2002, its consolidated revenues were approximately $453 million.

New York
Julia Turner
Managing Director
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Kathryn Kerle
VP - Senior Credit Officer
Corporate Finance Group

No Related Data.
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