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23 Apr 1998
MOODY'S ASSIGNS B1 TO VENCOR'S SECURED CREDIT FACILITIES AND B3 TO THE SR SUB NOTES
New York, 04-23-98 -- Moody's Investors Service assigned a B3 to Vencor Operating, Inc.'s proposed $300 million issue of guaranteed senior subordinated notes due 2005 and a B1 to the company's $1 billion senior secured credit facilities. The B1 rating assigned to the predecessor company's $750 million of 8 5/8% senior subordinated debentures due 2007 will be withdrawn upon completion of the reorganization. The obligor under the facilities, Vencor Operating, Inc., through its operating subsidiaries is one of the largest providers of long-term healthcare services in the United States and is a holding company which itself is a wholly owned subsidiary of Vencor, Inc., (the guarantor) also a holding company.
This rating action reflects Moody's concerns surrounding the company's high leverage, the rapid growth through acquisition and the possibility that the company's recent earnings disappointments may be attributable to more than the announced changes in Medicare reimbursement such as integration problems.
Moody's also notes the company continues to face significant regulatory event risk as a result of the Balanced Budget Act of 1997 and the implementation of both the Prospective Payment System (PPS) as well as the new TEFRA rates. Moody's is further concerned about the impact on the company of the investigation which has been undertaken into the company's treatment of Medicaid recipients and about the potential for this investigation to expand into other areas of the company's operations.
Moody's also has concerns about the timing of the company's reorganization, which is being executed to shore up the value of the company's stock and scheduled to be finalized just prior to the anticipated announcement date for HCFA's new PPS rates, and about the level of management's control over its local operations given the numerous public relations problems which the company has faced in recent weeks, including the confusion surrounding the Medicaid evictions.
The ratings further consider Moody's concerns regarding the weakness of the balance sheet, the significant off-balance sheet leverage as the company will no longer own any properties but instead will be making lease payments to Ventas at current market rates with no benefit from more favorable historical lease rates, and the potential for leverage to increase should the company opt for an acquisitive strategy. Moody's notes that there is substantial room in the indenture for the incurrence of additional indebtedness.
Mitigating factors reflected in the rating include the potential for Vencor's nursing center operations to benefit under the new Medicare PPS in the long run, particularly as the company's acuity levels for 1995 are higher than the national average. Additionally, the company offers the entire spectrum of long-term-care services, has state of the art patient information systems (VenTouch) which are being installed throughout its managed facilities and has signed a definitive agreement to sell the majority of its investment in Atria for approximately $177 million which will permanently reduce the Bridge portion of the company's secured credit facility.
Structurally, the B1 rating assigned to the secured credit facilities reflects the fact that the obligations under the agreement are structurally and effectively senior to all other obligations of the company, including the senior subordinated notes, as the repayment obligation is guaranteed by both the holding company, as well as the material operating subsidiaries (excluding insurance subsidiaries). Additionally, the obligations are secured by a lien on the capital stock of the company and its present and future material subsidiaries, all present and future intercompany debt, leasehold mortgages of leases under the Master Lease Agreement, a pledge of the stock of the assets held for sale, Atria and BHC, and substantially all other personal property of the Guarantor and its material subsidiaries. The credit facility also benefits from a tight covenant package.
The B3 rating assigned to the senior subordinated notes reflects the deep subordination of Vencor's obligation under the notes and the fact that there is the flexiblity to issue significant debt which is structurally senior to these obligations which could bear the guarantee of the subsidiaries. Additionally, pursuant to the indenture, regardless of the debt incurrence test and mandatory reductions on the term loans, the company will always have access to a $300 million revolving credit facility. Moody's notes that the indenture does include certain restrictive covenants related to the incurrence of indebtedness, restricted payments, asset sales and liens.
For the full year ended December 31, 1997, on a proforma basis, Vencor Operating Inc., generated $3.4 billion in revenues, yielding $254 million in adjusted EBITDA covering interest expense 2.6 times and EBITDAR of $573 million covering interest plus rent 1.4 times. Long term debt incurred by the company to execute the reorganization totaling $1.1 billion represents 54% of the total capital structure and is 4.2 times proforma EBITDA. Lease adjusted debt of $3.6 billion, which represents 80% of adjusted capitalization, is 6.3 times EBITDAR.
Proceeds from the $300 million issuance along with the $1 billion secured credit facility will be used to repay existing debt at the predecessor company as part of a reorganization of the company whereby the predecessor company is being split into two companies. Vencor Operating, Inc., will be a provider of healthcare which will not own any properties managed but instead will lease the properties from the second company being formed, Ventas, a real estate company which anticipates obtaining REIT status effective January 1, 1999.
Vencor Operating Inc., will be one of the largest providers of long-term healthcare services in the United States with $3.4 billion in pro forma 1997 revenues and operations spanning 46 states. The company will be managing 60 long term acute care hospitals containing 5,273 licenced beds, and 309 nursing centers containing 40,383 licensed beds, as well as providing contract services through Vencare to approximately 2,900 healthcare facilities.
No Related Data.
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