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Rating Action:

Moody's upgrades ConvaTec's CFR to Ba3

17 Nov 2016

New York, November 17, 2016 -- Moody's Investors Service (Moody's) today upgraded ConvaTec's Corporate Family Rating (CFR) to Ba3 and its Probability of Default Rating (PDR) to Ba3-PD. There are no changes to the Ba3 instrument ratings Moody's assigned on October 3, 2016 to ConvaTec's new senior secured credit facilities, including its $1.37 billion term loan A, its $430 million term loan B, and its $200 million revolver. All other ratings have been withdrawn. Lastly, Moody's assigned a Speculative Grade Liquidity Rating of SGL-1 to ConvaTec. This concludes Moody's review of ConvaTec's ratings. The outlook on all ratings is stable.

Moody's notes that as part of this rating action, it is relocating the Corporate Family Rating to ConvaTec Healthcare D S.a.r.l from ConvaTec Healthcare A S.a.r.l. for administrative purposes.

The upgrades of ConvaTec's CFR to Ba3 and PDR to Ba3-PD reflect the company's use of $1.8 billion of IPO proceeds to reduce its financial leverage. Moody's estimates that pro forma adjusted debt to EBITDA as of June 30, 2016 is approximately 4.3 times, marking a dramatic improvement in ConvaTec's leverage prior to the IPO.

"The material reduction in debt and hence interest expense will boost ConvaTec's free cash flow and provide the means for further deleveraging," stated Jonathan Kanarek, Moody's Vice President and Senior Analyst. "Generating approximately $200 million per annum in free cash flow after common dividends should help bring leverage to around 3.5 times debt/EBITDA by the end of 2017," added Kanarek.

Ratings Upgraded And To Be Withdrawn:

ConvaTec Healthcare A S.a.r.l.

Corporate Family Rating from B2 to Ba3 / to be withdrawn

Probability of Default Rating from B2-PD to Ba3-PD / to be withdrawn

Ratings Assigned:

ConvaTec Healthcare D S.a.r.l

Corporate Family Rating at Ba3

Probability of Default Rating at Ba3-PD

Speculative Grade Liquidity Rating at SGL-1

Ratings Unchanged:

ConvaTec Healthcare D S.a.r.l & ConvaTec Inc.

Senior secured revolving credit facility expiring 2021 at Ba3 (LGD 3)

Senior secured EUR/USD term loan A due 2021 at Ba3 (LGD 3)

Senior secured USD term loan B due 2023 at Ba3 (LGD 3)

The outlook is stable.

Ratings Withdrawn:

ConvaTec Inc.

Senior secured EUR/USD term loans due 2020 at Ba2 (LGD 2)

ConvaTec Healthcare E S.A.

Senior secured revolving credit facility due 2020 at Ba2 (LGD 2)

Senior unsecured notes due 2018 at B3 (LGD 4)

ConvaTec Finance International S.A. (withdrawn on November 11, 2016)

Subordinated PIK debentures due 2019 at Caa1 (LGD 6)

RATING RATIONALE

ConvaTec's Ba3 CFR reflects its moderately high financial leverage. The rating also incorporates the company's high business risks due to on-going operational challenges as well as lingering compliance, legal and regulatory issues. These issues create potential downside risks to earnings and cash flows that could hinder the company's ability to delever. Moody's is also mindful of the company's historically aggressive financial policies that resulted in repeated re-leveraging in recent years via acquisitions and a significant dividend payment.

ConvaTec's Ba3 CFR also reflects Moody's expectation for the company to maintain an attractive EBITDA margin of 29%, consistently positive free cash flow, and good liquidity. The company has a leading position in relatively predictable markets and a recurring revenue stream. Its breadth of products, track record of product life-cycle management and innovation, solid geographic diversification, and limited customer concentration partially mitigate the company's moderately high leverage.

The stable outlook reflects Moody's expectation that ConvaTec will maintain its improved financial flexibility and credit profile following its recent deleveraging and adopt a conservative financial policy.

The company's SGL-1 rating reflects Moody's expectation that ConvaTec will maintain very good liquidity supported by a solid cash balances, near-full availability on its revolver, and strong free cash flow.

Moody's could upgrade the ratings if ConvaTec is able to demonstrate consistent organic growth across its business lines. An upgrade would also require ConvaTec to reduce leverage, such that adjusted debt to EBITDA is sustained below 3.0 times.

A downgrade of the ratings could occur if Moody's expects ConvaTec to experience a deterioration in operating performance or adopt a more aggressive financial policy. Moody's could also downgrade the ratings if the company's debt/EBITDA is sustained above 4.0 times.

The principal methodology used in these ratings was Global Medical Product and Device Industry published in October 2012. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

ConvaTec Healthcare D S.a.r.l. ("ConvaTec") is a leading developer, manufacturer and marketer of products for ostomy management, advanced chronic and acute wound care, continence & critical care, sterile single-use medical devices for hospitals, and infusion sets used in diabetes treatment. Revenues are approximately $1.7 billion. ConvaTec is owned by Nordic Capital (45%) and Avista Capital Partners (20%). Moody's expects the combined ownership of these partners to decline appreciably, with the current owners making a complete exit over the next couple of years.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this rating action, and whose ratings may change as a result of this rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Jonathan Kanarek, CFA
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Peter H. Abdill, CFA
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

No Related Data.
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