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Rating Action:

Moody's Downgrades AGA Medical Corp's CFR to B3; Outlook Negative

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 directory.

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.

New York
Kendra M. Smith
Managing Director
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

New York
Dhruv Khanna
Analyst
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's Downgrades AGA Medical Corp's CFR to B3; Outlook Negative
No Related Data.
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