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Rating Action:

MOODY'S INVESTORS SERVICE ASSIGNED A Ba2 RATING TO CONMED CORPORATION'S $250 MILLION SENIOR SECURED CREDIT FACILITY; MOODY'S AFFIRMED EXISTING RATINGS AND CHANGED OUTLOOK TO NEGATIVE FROM STABLE

24 Mar 2006
MOODY'S INVESTORS SERVICE ASSIGNED A Ba2 RATING TO CONMED CORPORATION'S $250 MILLION SENIOR SECURED CREDIT FACILITY; MOODY'S AFFIRMED EXISTING RATINGS AND CHANGED OUTLOOK TO NEGATIVE FROM STABLE

Approximately $250 million of affected debt

New York, March 24, 2006 -- Moody's Investors Service ("Moody's") today assigned a rating of Ba2 to ConMed Corporation's proposed $250 million senior secured credit facility. Proceeds of the offering will be used to refinance its existing senior secured credit facility. Moody's will withdraw the ratings on the existing facility at the completion of the proposed financing transaction. Moody's also affirmed the Ba3 Corporate Family Rating and the B2 rating on ConMed's $150 million senior subordinated convertible notes. The ratings outlook was changed to negative from stable

The negative ratings outlook reflects deterioration in ConMed's results in the second half of 2005. Same store revenue fell by 2% in the second half of 2005 compared to a 7.5% increase in the first half of 2005. As a result, cash flow from operations declined from $75 million in 2004 to $51 million in 2005, while free cash flow dropped from $62 million to $35 million during this same time period. Cash flow was negatively affected by a $33 million increase in inventories and a decline in the sale of receivables.

Moody's believes the recent deterioration in ConMed's financial results is caused primarily by the following factors: lower than anticipated single-use products sales because of lower surgical procedures; lower than anticipated capital equipment sales as hospitals delayed concluding capital purchases; higher material costs for plastic-based products due to higher oil prices and an increase in legal costs in a suit against a larger competitor alleging unfair marketing practices; and, an increase in-bound and out-bound freight costs. Moody's believes that ConMed has maintained market share in its key segments and that it has not lost any major customers.

The ratings also consider the operational and financial risk of the company's strategy in supplementing internal growth with the acquisition of smaller companies and product divisions from other companies. Moody's notes that ConMed has completed nine acquisitions in the past ten years in order to diversify its core product line while penetrating new markets. In September 2004, ConMed acquired an Endoscopic Technology product from C.R Bard, which added approximately $60 million in annualized revenue and provided the company with a sixth business unit. ConMed has funded these acquisitions through a combination of both equity and debt.

Price increases in raw materials may pressure the company's operating costs while affecting the competitive position of ConMed's products. As mentioned earlier, the recent increase in raw material costs, particularly in oil related products such as resin, has pressured gross margins over the past few quarters. The ratings also consider the risk of operating abroad, including foreign exchange risk, as 37% of 2005 revenues came from outside of the United States. Lastly, Moody's is concerned that ConMed may have to accelerate research spending in order to remain competitive as the company only spends approximately 4% of its revenue on research and development. Research and Development expenditures increased by 26% to $25.5 million in 2005 and the company introduced 14 new products.

The ratings also consider the stability of the company's revenue because of its geographic diversity, as well as customer and product diversification. The company sells and distributes its products on a global basis in over 100 countries. The company has six major product segments: Arthroscopy, Powered Instruments, Electro surgery, Patient Care, Endo Surgery and Endoscopic Technology. The stability of the company's revenue is also enhanced by the fact that over 75% of the companies products are single-use disposable products, which provide an annuity-like stream of revenues.

ConMed manufactures most of its products and components, which allows it to contain costs, control quality, maintain the security of proprietary processes and react quickly to changes in demand. Moody's also notes that none of the critical raw materials are sourced from one single supplier. The company is able to capture the majority of the economics and value-added feature of its products as it has a direct sales-force of almost 400 people in the U.S and 50 sales representatives internationally. The company sells directly to hospitals in ten countries and uses dealers for its two major product lines, arthroscopy and powered instruments (55% of sales). ConMed also sells direct in the UK and Canada for its other four product lines.

Moody's expects that ConMed will continue to grow revenue between 4% and 6% over the next few years, benefiting from new product introductions, increased market share, and international growth of 7% to 9%. As a result, Moody's expects that operating cash flow should improve to a range of $60 million to $70 million in 2006 and a range of $70 million to $85 million in 2007 because of stable operating margins, modest working capital requirements, and capital spending of $15 million to $25 million a year. After adjusting for operating leases, Moody's anticipates that operating and free cash flow to debt will rebound from 10% to 13% and 6% to 8%, respectively, in 2005, to 25% to 28% and 20% to 22% in 2006.

If the company grows cash flows more rapidly than Moody's expects, and uses the excess cash flows to retire debt, the company's outlook could become stable. ConMed has set its debt to total capitalization target at the 35%-45% range, and is currently operating on the high end of that range. If it lowers its debt to total capitalization by issuing equity to retire debt in order to achieve the lower limit of its debt to total capitalization target, its outlook could also improve. Moody's would also like to see the company sustain free cash flow to debt ratios of 13% to 16% on a sustained basis.

Conversely, if competitive pressures further retard revenue and cash flow growth, or additional acquisition financing increases the company's debt burden materially, the ratings could be lowered. The ratings could also face downward pressure if recent results do not stabilize and cash flow continues to deteriorate. The ratings could be downgraded if the adjusted free cash flow to adjusted debt remains in the 6% to 8% range as was the case in 2005.

ConMed intends to issue a new $150 million Term Loan Facility and $100 million Revolving Credit Facility. As noted earlier, proceeds from the new facility will be used to refinance its existing $141 million senior secured credit facility as well as for general corporate purposes. As a result of the refinancing, total leverage does not increase much, assuming the revolver remains at full, or nearly full, capacity over the next twelve months. In fact, Moody's rating incorporates our expectation that availability under the company's $100 million proposed revolving credit facility will remain virtually in tact. Under the terms of the proposed transaction, ConMed will have a maximum total leverage ratio, a minimum fixed charge coverage ratio and maximum total senior leverage ratio of 4.5 to 1 (steps down to 4.0 to 1 for quarter ended December 31, 2006), 2.25 to 1 and 3.0 to 1, respectively, in 2006. Moody's expects that the company will have sufficient cushion and remain in compliance with these financial covenants under its credit facility for the next twelve months. The company has more cushion in the covenants of the new credit facility compared to those in the existing facility

Moody's rated the senior credit facility one notch above the Corporate Family Rating because Moody's believes there is sufficient collateral coverage in a distressed scenario. That belief is based on the bank debt's seniority, guarantees from subsidiaries, and a collateral package consisting of substantially all assets of the company. The rating reflects a lower expected loss for the senior secured class of debt relative to the senior subordinated debt class and any potential senior secured debt.

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.

Moody's assigned the following ratings:

(i) $100 million Senior Secured Revolver, due 2011, rated Ba2

(ii) $150 million Senior Secured Term Loan B, due 2013, rated Ba2

Moody's affirmed the following ratings:

(i) Corporate Family Rating, at Ba3

(ii) $150 million senior subordinated convertible notes, due 2024, at B2.

The ratings outlook was changed to negative from stable.

After the close of the proposed transaction, Moody's will withdraw the following ratings assigned to ConMed:

(i) $100 million revolving credit facility, due 2007, rated Ba3

(ii) $140 million Term Loan B, due in 2009, rated Ba3

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. In 2005, its consolidated revenues were approximately $617 million.

New York
Patrick Finnegan
Managing Director
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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