Moody's rates Kyphon loans B1

Moody's Investors Service said it assigned a B1 corporate family rating, B2 probability-of-default rating, SGL-1 speculative grade liquidity rating and a loss-given-default assessment of LGD3 (35%) to Kyphon Inc. and B1 ratings with loss-given-default assessments of LGD3 (34%) to the company's proposed $675 million senior secured credit facility, which consists of a $300 million revolving credit facility due 2011 and a $375 million term loan B facility due 2013.

The outlook is stable.

The company plans to use the proceeds from the term loan along with cash on hand and borrowings under the revolving credit facility to finance the purchase of St. Francis Medical Technologies, Inc. Under the terms of the agreement, Kyphon will acquire 100% of the fully diluted equity of St. Francis for $525 million in cash and additional revenue-based contingent payments (earnout payments) of up to $200 million payable in 2008 in either cash or a combination of cash and stock, at Kyphon's election. Moody's believes the biggest advantage of the acquisition will be the sale of the X STOP system through Kyphon's sales force.

The agency said the B1 corporate family rating reflects Kyphon's diversity by customer sales segment, concentration by top customer segment and leverage.

While Moody's is concerned by the small size of the company and the operational and financial risks involved with a debt-financed transforming acquisition, the agency noted that Kyphon's operating margins, interest coverage and return on assets are higher than other companies in the B rating category.

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