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Rating Action:

MOODY'S ASSIGNS B2 RATING TO BEVERLY'S PROPOSED OFFERING OF SENIOR SUBORDINATED NOTES; OUTLOOK IS REVISED TO STABLE FROM NEGATIVE

14 Jun 2004
MOODY'S ASSIGNS B2 RATING TO BEVERLY'S PROPOSED OFFERING OF SENIOR SUBORDINATED NOTES; OUTLOOK IS REVISED TO STABLE FROM NEGATIVE

Approximately $565 Million of Debt Securities Affected.

New York, June 14, 2004 -- Moody's Investors Service assigned a rating of B2 to Beverly Enterprises, Inc.'s ("Beverly") $225 million senior subordinated notes due 2014. In addition, Moody's affirmed the existing ratings of the Company and revised the outlook to stable from negative. The rating action follows the announcement by the Company that the new note issuance, along with cash on the balance sheet, will be used to tender for the Company's $200 million 9.625% senior subordinated notes due 2009.

Ratings assigned:

• $225 million senior subordinated notes due 2014, rated B2

Ratings affirmed:

• Senior implied rating, Ba3

• Senior unsecured issuer rating, B1

• $90 million (proposed increase from $75 million) senior secured credit facility due 2007, rated Ba3

• $135 million Term Loan B due 2008, rated Ba3

• $115 million convertible subordinated notes, rated B2

Ratings to be withdrawn:

• $200 million 9.625% senior notes due 2009, rated B1

The outlook is revised to stable from negative.

The ratings reflect the decrease in senior leverage, increasing tenor of debt maturities as a result of the refinancing, and expected improvement in average interest expense; Beverly's leading position in the markets in which the company competes; the company's geographic diversity with operations in twenty-three states, which diversifies its Medicaid mix; the company's focus on facility rationalization, which has led Beverly to exit several unprofitable markets, namely Florida, Arkansas and other planned divestitures this year; strengthening of the board of directors and management team; the company's balance sheet strengthening, which has allowed it to continue to operate during periods of unstable reimbursement; and Beverly's good liquidity position with access to a $90 million revolving credit facility and pro forma cash of approximately $210 million (prior to the acquisition of Hospice USA, announced in May 2004).

The ratings also reflect the company's susceptibility to changes in government reimbursement programs either through Medicare or Medicaid; exposure to professional liability claims against the company; the risks associated with maintaining adequate professional and clinical staffing at the company's facilities in light of the ongoing nurse labor shortage; and ongoing contingent liabilities and shareholder lawsuits.

The stable outlook reflects Beverly's successful operations for the last several years through a challenging reimbursement environment. If the company continues to focus on core markets to drive revenue growth and operating efficiencies, and continues to selectively exit unprofitable regions resulting in continued improvement in cash flow and deleveraging of the balance sheet, Moody's would see positive momentum on the ratings. Moody's also notes the positive effect on revenue and cash flow attributable to the company's rehabilitation business. If changes in reimbursement methodology result in reduced reimbursement for therapy services and a resultant reduction in cash flow, the ratings could be adversely affected.

The stable outlook also reflects Moody's belief that Beverly's focus on the hospice market diversifies the company's cash flow stream, even though entering an effectively new market (the Home Care segment represented only 2% of revenue in FY 2003) is inherently risky for any company. Moody's anticipates Beverly continuing to make small in-market acquisitions, including hospice providers. However, if Beverly completes a major acquisition resulting in a re-leveraging of the balance sheet, Moody's would likely downgrade the ratings.

Beverly currently self insures a portion of its professional liability costs and has further coverage through the purchase of excess insurance. If the frequency and severity of professional liability claims were to begin to increase, resulting in higher accruals and pressure on operating margins, Moody's would see ratings pressure.

Following the issuance of the senior subordinated notes, Beverly will have high leverage for the Ba3 rating category. Pro forma debt to EBITDA would be 3.6 times and including the Hospice USA acquisition, leverage will be 3.4 times for the twelve months ended March 31, 2004. Pro forma adjusted debt to EBITDAR would be 4.7 times, and will be 4.6 times pro-forma for the Hospice USA acquisition. Pro forma EBITDA to interest would be 3.5 times prior to the Hospice USA acquisition, and 3.7 times after giving effect to the acquisition.

Cash flow coverage of debt is low for the Ba3 category. For the twelve months ended March 31, 2004, Beverly's pro forma cash flow to debt would have been approximately 5.3%. Capital expenditures for the business are approximately 3.7% of revenues, which would result in a pro forma free cash flow to debt of (8.2)% for the same period. Low cash flow is a result of the termination of Beverly's off-balance sheet accounts receivable vehicle, Beverly Funding Corp., which resulted in a consolidation of accounts receivable previously accounted for as sales. However, Beverly is expected to improve near-term liquidity by the cash realization of its investment in Beverly Funding Corp. Moody's expects cash flow to debt coverage to increase in fiscal year 2005 to approximately 23%, while free cash flow coverage of debt will be approximately 10%.

Moody's notes that Medicare reimbursement increased by 6.26% for the 2004 period (enacted on October 1, 2003). However, legislation is currently pending regarding refinement of certain RUGS categories that may change reimbursement starting in 2005. If the change in RUGS categories represents a significant negative cash flow effect to Beverly, the ratings may come under pressure. Beverly has also experienced consistent Medicaid rate increases over the last several years, averaging approximately 3-4%. Additionally, the current moratorium on outpatient Part-B therapy caps was extended to December 2005. If a payment cap that would significantly affect cash flow of Beverly is instituted, the ratings would likely come under pressure.

The senior subordinated notes are notched two levels below the senior implied rating as a result of the unsecured nature of the obligations and the subordinated nature of the notes, but reflect the guarantees of substantially all of the company's subsidiaries.

Beverly Enterprises, Inc., headquartered in Fort Smith, Arkansas is a leading provider of post-acute healthcare in the United States. As of April 30, 2004, Beverly operated 368 nursing facilities with a total of 38,874 licensed beds in 23 states and Washington D.C. The company also operates 19 assisted living centers containing 526 units, 25 hospice and home care centers, 10 outpatient clinics, and provides rehabilitative services in 35 states and Washington D.C. For the twelve months ended March 31, 2004 Beverly reported revenues of $2,030.9 million.

New York
Patrick Finnegan
Managing Director
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

New York
Terence Moore
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

No Related Data.
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