Fitch Downgrades Boston Scientific Corp. to 'BBB' After Guidant Acquisition

Business Wire, April 21, 2006

CHICAGO -- Fitch Ratings has downgraded Boston Scientific Corp. (BSX) following today's completion of the company's $29 billion acquisition of Guidant Corp. (including approximately $90 million in interest paid to Guidant shareholders).

Consistent with Fitch's press release dated Feb. 10, 2006, Fitch has downgraded BSX as follows:

-- Issuer Default Rating (IDR) to 'BBB' from 'A';

-- Senior unsecured notes to 'BBB' from 'A';

-- Unsecured bank credit facility ratings to 'BBB' from 'A';

-- Commercial paper rating to 'F2' from 'F1'.

The Rating Outlook is Stable.

The ratings further apply to the BSX financing used to fund the acquisition. BSX completed the following financings to complete the transaction:

-- $5 billion 5-year term loan;

-- $7 billion 364-day interim loan commitment (BSX drew approximately $700 million to fund the transaction and will likely term this amount out with approximately $2 billion in new senior notes offerings in the near term);

-- $2 billion 5-year revolving credit facility (undrawn).

The 'BBB' rating primarily reflects the increased leverage resulting from the Guidant transaction, offset by strong strategic benefits of combining two market leading entities with strong respective cash flows. The rating, however, also reflects the limited visibility on the strength of the Guidant (GDT) Cardiac Rhythm Management (CRM) business in the near term following a series of field actions and recalls in 2005. Additional concerns include potential product liability exposure related to CRM field actions and regulatory compliance concerns at both GDT and BSX.

The investment grade rating is supported by significant cash flow generation, strong liquidity and the expectation that cash flow will be used for rapid debt reduction. The combined company will have the capacity to reduce gross debt quickly given its ability to generate significant cash flow. Fitch anticipates that the combined entity would generate net cash flow from operations (NCFFO) in excess of $1.8 billion and free cash flow (after capital expenditures) of $1.5 billion (approximately 16% of total debt) in 2006 and accelerating after that.

The investment grade rating is further supported by the combined company's leading market presence and diverse, high-margined product base (including a reduced reliance on Taxus, BSX's drug-eluting coronary stent (DES) that previously accounted for more than 40% of BSX revenues and a higher percentage of earnings). A combined BSX/GDT will be positioned as a leader in the worldwide DES market (approximately $5 billion WW sales in 2005, 7% CAGR for the next five years) and the only participant with two DES platforms using two different drug families. Further, the combined BSX/GDT will be a significant market share participant in the CRM business (approximately $10 billion WW sales in 2005, 20% CAGR for the next five years).

Fitch expects 2006 leverage (total debt/EBITDA) will increase to approximately 3.5 times (x) to 3.8x, with FFO/Adjusted leverage of 4.0x-4.2x. However, Fitch has a high degree of confidence in the company's commitment to reduce debt and anticipates leverage metrics will improve to 2.2x-2.5x and 2.5x-3.0x, respectively, by Dec. 31, 2007.

The combined company faces a series of challenges that need to be monitored as they have a direct bearing on the company's expected credit strength. Namely, the post-recall recovery of the CRM business, potential product liability exposure at GDT, possible patent litigation exposure, and FDA compliance concerns at both GDT and BSX.

Should one or more of these challenges manifest in lower-than-expected sales (additional product recalls, failure to recapture CRM share, the delay of key products) or higher-than-expected costs (patient liability and/or regulatory fines) BSX's credit profile could weaken and Fitch would respond accordingly. Conversely, if these challenges are effectively met and cash flow generation exceeds expectations or debt is repaid faster than anticipated, Fitch would also recognize the related positive credit implications.

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.