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Rating Action:

MOODY'S ASSIGNS Ba3 TO FRESENIUS' NEW TRUST PREFERRED ISSUE AND CONFIRMS OTHER LONG-TERM DEBT RATINGS

10 Feb 1998
MOODY'S ASSIGNS Ba3 TO FRESENIUS' NEW TRUST PREFERRED ISSUE AND CONFIRMS OTHER LONG-TERM DEBT RATINGS New York, 02-10-98 -- Moody's Investors Service assigned a Ba3 rating to new Trust Preferred Securities in the amount of $400 million and DM 180 million to be issued by two separate special purpose subsidiaries of Fresenius Medical Care AG (FMC). Moody's also confirmed its Ba3 ratings assigned to $360 million of similarly structured Trust Preferred Securities and the Ba1 rating assigned to the company's senior secured credit facilities issued by National Medical Care (NMC) as amended and restated. FMC is the worlds largest integrated provider of dialysis products and services.
Proceeds from the trust securities, estimated to be $500 million, will be invested in the senior subordinated notes which serve as collateral for the Trust Certificate Holders. The issuer of the notes, special purpose Luxembourg finance subsidiaries, will in turn advance the entire amount to FMC and its subsidiaries to repay certain outstanding indebtedness and for general corporate purposes, including future acquisitions. Pursuant to the terms and conditions of the existing credit agreement, as amended, $195 million of the proceeds from this transaction will be used to permanently reduce the term loan portion of the credit facilities. The remainder will be applied to the revolver and available for future use.
Ratings assigned are:
Fresenius Medical Care Capital Trust II - USD Trust Preferred Securities at Ba3
Fresenius Medical Care Capital Trust III - DM Trust Preferred Securities at Ba3

Ratings confirmed are:
National Medical Care, Inc. - Bank Credit Agreement at Ba1
Fresenius Medical Care Capital Trust - USD Trust Preferred Securities at Ba3

Credit factors reflected in the ratings include Moody's view that the company faces significant integration risks, particularly as management opted to continue its aggressive acquisition program during 1997 instead of focusing on the attainment of synergies through integration as anticipated and overall competition appears to be heightening as the industry continues to consolidate with three chains now accounting for roughly 48% of the total dialysis US market. Additionally, Moody's believes that there will be ongoing pressure on margins as cost cutting opportunities are exhausted and Medicare continues to keep nominal reimbursement rates flat resulting in a continued decline in the real reimbursement rate for services provided. Moody's further notes that the company's Homecare business has underperformed expectations largely due to changes in Medicare qualification procedures for IDPN (Intradialytic Parenteral Nutrition) patients and managed care pressure. Moody's continues to have serious concerns about the potential size of fines which the company could face as a result of the OIG investigation and various whistle-blower lawsuits as well as the potential for additional "tag-along-suits" similar to the one brought against the company by Aetna.
Structurally, holders of the Trust Preferred Securities face far greater risks as compared to the holders of the senior credit facilities which are direct obligations of FMC and NMC, the company's primary cash flow generating subsidiary. In contrast, holders of the Trust Preferred Securities do not benefit from any claim on NMC's cash flow but rather are indirectly supported by all other operating subsidiaries of the company through guarantees of the senior subordinated notes. Additionally, the credit agreement restricts dividend payments from the operating companies, and holders of the notes have limited protection in the event of a change of control. Moody's notes, however, that the Trust Preferreds are supported by senior subordinated notes as opposed to junior notes, there is currently no other debt at the company (other than the credit facility), and the indenture for the senior subordinated notes includes limitations on additional indebtedness.
Mitigating factors reflected in the rating include the company's continued diversification of its revenue stream through international expansion and the establishment of a presense in each of its targeted US markets which should lead to a slow down in the acquisition pace in 1998. Additionally, the company benefits from being the largest provider of a necessary service which brings with it a stable cash flow stream and anticipated growth in industry wide patient volume of 9% per annum. The company also benefits from cost advantages vis-a-vis its competitors as a result of being vertically integrated. Moody's also notes that the company has financed a portion of its expansion through issuance of approximately $225 of equity securities.
Fresenius, headquartered in Germany, is the world's largest integrated provider of dialysis products and services focusing on three main areas, Dialysis Services, Dialysis Products and Homecare and Non-Renal Diagnostics Services.

No Related Data.
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