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14 Sep 2009
Approximately $220 million of rated securities affected
New York, September 14, 2009 -- Moody's Investors Service downgraded the corporate family rating
of AGA Medical Corporation ("AGA") to B3 from B2. The
rating outlook is negative. This concludes the review for downgrade
initiated on March 11, 2009.
The downgrade reflects increased credit risk as a result of an aggressive
growth strategy that has eroded liquidity and the potential impact of
a recent adverse jury verdict in a patent infringement case. In
Moody's opinion, the ratings remain under pressure due to
these ongoing challenges which offset the company's underlying fundamental
performance. Moody's believes that the legacy business (involving
the manufacture and distribution of medical devices to address structural
heart defects and vascular diseases) continues to maintain high gross
margins and generate strong levels of EBITDA.
The lower rating considers Moody's view of AGA's weak liquidity
profile. Since the end of 2008, the company has accelerated
its debt-funded acquisitions of certain distribution rights,
inventory, equipment, intangible assets and goodwill from
several foreign distributors in order to further enhance its profitability.
This, combined with working capital pressures stemming from the
change in distribution strategy, has resulted in minimal balance
sheet cash and a fully drawn $25 million credit facility at June
30, 2009. Moreover, in Moody's opinion,
AGA faces the possibility of covenant compliance issues in late 2009 or
early 2010. Without a material improvement in the liquidity situation
in the near-term, the B3 rating is likely to be further pressured.
The downgrade also incorporates the legal issues that, in Moody's
opinion, could have a material effect on AGA's future performance.
While Moody's recognizes that litigation may be common in the medical
device space, over the past few years, the company has had
a $30 million settlement with NMT Medical, Inc. and
one other party regarding a patent infringement lawsuit and has entered
into a Deferred Prosecution Agreement in regards to the Foreign Corrupt
Practices Act. Most recently, AGA reported that a jury found
that it had infringed on some of the patents of Medtronic, Inc.
(A1/stable). According to certain reports, the jury recommended
that the company be held liable for approximately $58 million in
past damages, and the company may be obligated to make future royalty
payments to Medtronic. While Moody's understands that there
is significant uncertainty regarding the timing or magnitude of any final
judgment, the verdict creates a meaningful overhang for a company
of AGA's small size which would be challenged to finance such an
obligation independently. The company's ongoing legal issues
and history of adverse judgments remain significant ratings constraints.
The negative rating outlook reflects the continued pressure on the ratings
as a result of the precarious liquidity position and the uncertainties
regarding the impact of the jury verdict. The ratings could be
downgraded if (i) there is not a near-term material improvement
in liquidity, (ii) there is a ruling that required AGA to pay significant
cash penalties over the near-term, or (iii) operating and
financial performance were expected to deteriorate to levels inconsistent
with the current rating.
Ratings affected by today's actions include:
-Corporate Family Rating lowered to B3 from B2
-Probability of Default Rating lowered to B3 from B2
-Senior secured revolving credit facility lowered to B2 (LGD 3;
37%) from B1 (LGD 3; 42%)
-Senior secured term loan rating lowered to B2 (LGD 3; 37%)
from B1 (LGD 3; 42%)
-Outlook is negative
For more information, please see the credit opinion posted on Moodys.com.
The prior rating action was on March 11, 2009, when the ratings
were placed under review for possible downgrade.
The principal methodology used in rating AGA Medical Corporation was the
Medical Products and Device Industry Methodology, which can be found
at www.moodys.com in the Credit Policy & Methodologies
directory, in the Ratings Methodologies subdirectory. Other
methodologies and factors that may have been considered in the process
of rating this issuer can also be found in the Credit Policy & Methodologies
AGA Medical Corporation is a manufacturer of nitinol-based occlusion
devices for the treatment of cardiovascular defects and peripheral vascular
disease. The company had approximately $180 million in revenues
for the twelve month period ended June 30, 2009.
Kendra M. Smith
Corporate Finance Group
Moody's Investors Service
Moody's Downgrades AGA Medical Corp's CFR to B3; Outlook Negative
Corporate Finance Group
Moody's Investors Service
No Related Data.
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