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Rating Action:

MOODY'S ASSIGNS B1 TO SENIOR GUARANTEED NOTES OF BEVERLY ENTERPRISES, INC. AND B3 TO 5.5% CONVERTIBLE SUBORDINATED DEBENTURES; DOWNGRADES RATINGS ON 7.625% CONVERTIBLE SUBORDINATED DEBENTURES (TO B2); REMOVES CREDIT RATINGS FROM WATCHLIST, THOUGH NEGATIV

12 Dec 1995
MOODY'S ASSIGNS B1 TO SENIOR GUARANTEED NOTES OF BEVERLY ENTERPRISES, INC. AND B3 TO 5.5% CONVERTIBLE SUBORDINATED DEBENTURES; DOWNGRADES RATINGS ON 7.625% CONVERTIBLE SUBORDINATED DEBENTURES (TO B2); REMOVES CREDIT RATINGS FROM WATCHLIST, THOUGH NEGATIV New York, 12-12-95 -- Moody's Investors Service assigned a B1 rating to Beverly Enterprises, Inc.'s proposed $150 million of senior notes, due 2005, and a B3 rating to Beverly's $150 million 5.5% convertible subordinated debentures, due 2018. The ratings reflect the company's improving cash flow generation that has resulted from significant property dispositions in the recent past, favorable changes in the company's patient mix, increased generation of higher margin ancillary service revenues, expense controls and generally favorable reimbursement rates and labor markets. In spite of the improving cash flow generation, the ratings also reflect the company's weak return on Beverly's $2.5 billion asset base. Another negative factor which played a crucial role in the rating assignments is the relative ranking of the two unsecured debt issues within the company's complex and highly-secured capital structure. Moody's added that the consolidated company's credit ratings have been removed from the rating agency's published watchlist. However, the outlook for all but the B3-rated convertible suborinated debentures remains negative over the next 12-24 months because of the reduced cash flow available to bondholders that would result from a spin-off of Pharmacy Corporation of America (PCA), a subsidiary of the company which provides higher margin institutional pharmacy services, as well as the possible distribution of a significant portion of proceeds to shareholders.
Adjusted for the exchange of the company's preferred stock into the 5.5% convertible subordinated debentures, the consolidated capital structure included $1.1 billion of debt and $880 million of book equity (before considering $380 million of goodwill and the announced write off of $100-$110 million as the company revalues its assets in accordance with FASB 121) as of September 30, 1995. Much of this debt is located at Beverly Health and Rehabilitation, the company's nursing home operating subsidiary. Furthermore, even after the use of senior note proceeds to repay secured debt, almost $700 million of debt and capital leases (or almost 65% of total debt) will remain secured by approximately half of the company's owned nursing home properties and by the stock of PCA. Moody's added that 291 of the company's 706 nursing homes are financed through operating leases, and that the leased properties and the $97 million of annual rent expense associated with the properties are not reflected on the company's balance sheet. If capitalized, these leases would approximate $800 million of secured debt financing. Moody's recognizes that the issuance of the senior unsecured notes at the holding company reflects management's intention to simplify the capital structure over time. However, the B1 rating on the proposed senior unsecured notes continues to reflect the significant amount of secured debt ahead of the holding company notes. The presence of guarantees by substantially all of the company's present and future subsidiaries only partially mitigates the lack of security.
Regarding the 5.5% convertible subordinated debentures, Moody's commented that the B3 rating reflects their deep subordination within the company's capital structure. The indenture states that the debentures rank pari passu with the company's 7.625% convertible subordinated debentures (rated B2). However, the 7.625% debentures benefit from the fact that both Beverly and its nursing home subsidiary, Beverly Health and Rehabilitation, are co-obligors of the notes. In the case of the convertible subordinated debentures, the holding company is the sole obligor.
Moody's also revised the rating on the 7.625% convertible subordinated debentures to B2 from B1, reflecting the significant amount of debt ranking senior to the debentures as well as the subsidiary guarantees of the senior unsecured notes.
The company's credit ratings have been removed from Moody's published watchlist. However, the outlook for the company's ratings over the next 12-24 months remains negative because of Moody's concerns that a sale or spin-off of PCA will reduce the cash flows available to bondholders at the same time that shareholders could benefit from restricted payments. Recent acquisition integration problems at the subsidiary have postponed the transaction, but Moody's believes that the likelihood for a transaction in the intermediate future is high. Moody's noted that a covenant in the proposed senior notes' indenture places some restrictions on the transaction, and it would likely result in the paydown of some debt in order to complete the transaction. Under that covenant, the company could spin off PCA only if: Beverly's fixed charge coverage ratio (pro-forma for the transaction) would not be reduced by more than 15% from Beverly's fixed charge coverage ratio for the trailing twelve months (approximately 3.3 times for the twelve months ended September 30, 1995), and if Beverly's debt to consolidated cash flow as of the date of the transaction would not be increased by 15% or more from Beverly's actual debt to consolidated cash flow (approximately 3.6 times as of September 30, 1995 and adjusted for the exchange of the preferred stock). Nevertheless, Moody's emphasized that, if these conditions are met, up to $100 million of the proceeds could be used for restricted payments, directly benefiting the company's equity investors. At present, 16-17% of consolidated cash flows are generated by Beverly's PCA subsidiary. However, considering the significant amount of goodwill created in the buildup of the pharmacy subsidiary, Moody's stressed the fact that PCA represents 20-25% of consolidated EBITA, a measure which Moody's believes is a truer reflection of cash generation. Also, Moody's added that bondholders stand to lose one of the company's higher margin sources of cash once the integration difficulties at PCA are overcome. Finally, Moody's believes that management will remain pressured to improve its stock price as long as the company's asset returns lag those of its competitors.
Beverly Enterprises, Inc. is the largest domestic provider of nursing home and related services. The company is headquartered in Fort Smith, Arkansas.

No Related Data.
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