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Rating Action:

MOODY'S ASSIGNS B2 RATING TO CONMED CORPORATION'S SENIOR SUBORDINATED CONVERTIBLE NOTES; EXISTING RATINGS AFFIRMED

17 Nov 2004
MOODY'S ASSIGNS B2 RATING TO CONMED CORPORATION'S SENIOR SUBORDINATED CONVERTIBLE NOTES; EXISTING RATINGS AFFIRMED

APPROXIMATELY $390 MILLION OF DEBT SECURITIES AFFECTED

New York, November 17, 2004 -- Moody's Investors Service today assigned a rating of B2 for ConMed Corporation's $150 million senior subordinated convertible notes, due 2024. Moody's also affirmed ConMed's existing ratings. The ratings outlook remains stable.

Moody's took the following rating actions:

(i) Assign a B2 rating on ConMed's $150 million senior subordinated convertible notes, due 2024

(ii) Affirm the Ba3 rating on ConMed's $240 million guaranteed senior secured credit facility consisting of a $100 million revolving credit facility, due 2007, and a $140 million Term Loan B, due in 2009;

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

(iv) Affirm ConMed's Senior Unsecured (non-guaranteed exposure) Issuer Rating of B1; and

(v) Affirm a stable ratings outlook.

Our ratings reflect steady and consistent internal revenue growth, increasing operating cash flow, and a stable level of capital expenditures required to support its business plan. Despite increased debt associated with the recent $80 million acquisition of the Endoscopic Product Line from C. R. Bard and a higher debt to capitalization ratio of 42%, ConMed's credit metrics have improved. By the end of the 2004, the ratio of earnings before interest and taxes to interest is projected to expand to over 7.5 times and the ratio of adjusted free cash flow to adjusted debt should improve to approximately 18%.

Supporting ConMed's ratings are favorable industry trends. Moody's expects that, as the populations of developed countries age and live longer, they will need more surgical procedures, creating a market for ConMed's products. 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. Disposables accounted for 75% of ConMed's total sales in 2003, a proportion that is likely to hold over the rating horizon, lending stability to its cash flows and hence additional support to its ratings. The combination of these trends bode well for continued growth in ConMed's markets.

ConMed's recent purchase of C.R. Bard's Endoscopic division fits with its long-term strategy of supplementing internal growth and development with acquisitions. The company will inherit sales of 50 people who target physicians who treat GI disorders. The new salesforce could potentially cross-sell some of ConMed's existing products. Further, the addition of the Endoscopic product line should accelerate the company's overall rate of revenue growth and stabilize gross margins.

Lending further support to ConMed's ratings are the company's geographic and product diversification, vertically integrated and low manufacturing operations, extensive marketing and product distribution infrastructure, successful integration of acquisitions over the past few years, minimal reimbursement pressure, and the recent acceleration in the rate of internal growth. The company has established a strong market position in most of the markets that it serves. For example, the company is the second largest provider in its two most important markets, arthroscopy and powered instruments. ConMed also is also one of the leading providers of medical devices for the electrosurgery, ECG electrodes, and EndoSurgery markets.

Somewhat mitigating ConMed's strong market share in its major markets is the intense competition that the company faces from larger and better-capitalized companies in a number of its businesses. Stryker, Tyco, Johnson and Johnson and 3M (patient care) all have significant positions in one or more of the sectors that ConMed serves. In addition, the company faces pricing pressure in its more commodity-like products such as surgical suction instruments, tubing and ECG electrodes. As these markets continue to mature, the company will continue to experience pricing and margin pressures. Lastly, ConMed has been reliant on acquisitions to enhance the overall growth of its revenues and cash flows.

The stable rating outlook reflects Moody's expectation that ConMed will continue to grow revenue and cash flows at a moderate, 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 cash flows 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 debt to total capitalization through 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 change to negative.

ConMed has recently issued $150 million senior subordinated convertible notes, due 2024. The company will use the proceeds to repay $120 million of borrowings under its senior credit facility, some of which was incurred to effect the C.R. Bard product line acquisition, and to purchase $30.0 million shares of ConMed's common stock. The notes are convertible into common stock, and cash.

The B2 rating on the senior subordinated convertible notes reflects the contractual subordination to senior debt at the issuing entity, ConMed. The rating also incorporates an effective subordination to total obligations at the operating subsidiaries. The senior subordinated convertible notes are not guaranteed.

The affirmation of the Ba3 rating for the existing credit facility considers the bank debt's seniority, guarantees from subsidiaries, and a collateral package consisting of substantially all assets of the company. The senior credit facility, however, is placed at the same level of the senior implied rating due to the limitation of the collateral package, significant amount of intangible assets (67% of total assets), and the predominant amount of senior debt (72% of total adjusted debt).

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, otolaryngology, neuro-surgery and other surgical specialties. The company is a leading developer, manufacturer and supplier of radio frequency electrosurgery systems used routinely to cut and cauterize tissue in nearly all types of surgical procedures, endoscopy products such as trocars, clip appliers, scissors and surgical staples and a full line of electrocardiogram electrodes for heart monitoring and other patient care settings. The company also offers integrated operating room systems and equipment. ConMed's products are used in a variety of clinical settings, such as operating rooms, surgery centers, physicians' offices and hospitals. In 2003, its consolidated revenues were approximately $497 million.

New York
Kendra M. Smith
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

New York
Paul D. Bienstock
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

No Related Data.
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