MOODY'S ASSIGNS INITIAL CREDIT RATINGS TO SUBSIDIARIES OF FRESENIUS MEDICAL CARE AG; BANK CREDIT AGREEMENT AT Ba1
New York, 11-20-96 -- Moody's Investors Service assigned initial debt ratings to subsidiaries of Fresenius Medical Care AG . Fresenius Medical Care AG ("Fresenius") was formed by the combination of the dialysis products business of Fresenius AG and National Medical Care ("NMC"), which was spun off from W.R. Grace. Moody's ratings reflect fundamental credit risks associated with the kidney dialysis industry's dependence on Medicare, ongoing acquisitions and integration, and outstanding litigation. Positive factors considered in the ratings include stability stemming from the "annuity-like" nature of the business and Fresenius' sizable market presence. The rating also incorporates Moody's belief that profitability will improve through realized synergies as well as growth in services and products.
Ratings assigned are:
National Medical Care, Inc. -- Bank Credit Agreement at Ba1
Fresenius Medical Care Capital Trust -- Trust Preferred Securities at Ba3
Moody's said that the Ba1 rating assigned to National Medical Care's $2.5 billion bank credit agreement incorporates limited value for the collateral securing the revolving credit facility- the stock of the borrower and its subsidiaries- because of the uncertain value of such collateral in a distress scenario. The Ba3 rating for the Trust's Preferred Securities is based on a guarantee from Fresenius Medical Care AG on a senior subordinated basis provided through an intercompany loan which, in turn, is guaranteed by the material subsidiaries of Fresenius Medical Care AG.
Primary credit strength for Fresenius is derived from its strong market position as a leader in dialysis services in the U.S., with 21% of the dialysis market and is the second largest manufacturer of dialysis products. In addition, absent kidney transplantation, most patients generally require dialysis for life, providing stability in the core business segment. Annual patient growth rates should be sustained by an aging population and longer survival rates. Furthermore, Moody's expects international business to improve as governments begin providing coverage for these services.
As part of the transaction that created the company, NMC borrowed $2.5 billion under its credit agreement, of which $2.1 billion was paid as a dividend to Grace. The new company began, therefore, as a relatively leveraged company . Proceeds from the trust preferred offering and the sale of preference shares will be used to pay down almost $800 million of bank debt, thereby modestly lowering proforma book leverage. Although proforma interest coverage is narrow, debt protection instruments should improve over time based on expected synergies and expanded revenues.
Currently, the company and the industry are highly dependent on Medicare's End Stage Renal Disease Program, a program which began in the 1970s and which has made kidney dialysis available to all individuals, regardless of age. Since the mid-1980s, reimbursement rates per treatment under the program have remained relatively flat on a nominal basis and have declined on an inflation-adjusted basis although the number of patients covered by this program has increased over this same time period. Close to 60% of the company's revenues related to dialysis are generated from Medicare. Furthermore, although it is relatively early in development, the introduction of managed care to this business, particularly in the homecare arena, has begun to pressure margins. Risks associated with Medicare dependence and managed care pricing are highlighted by the decline in nine-month interim performance. Faced with this declining reimbursement environment, the company and industry have moved toward consolidation to gain efficiencies. In a highly fragmented industry, the company has been able to take advantage of consolidation, having acquired over 300 facilities over the past several years. As a result, Moody's believes there is some risk associated with integration and consolidation.
The company is being investigated by the OIG for possible violations by NMC of federal laws. including the anti-kickback statutes and the False Claims Act. In addition, there are numerous other lawsuits currently pending, including several "whistleblower" suits in various states. Although the outcome of these lawsuits is unknown at this time, Moody's believes these legal actions provide additional risk to the company's credit profile.
Fresenius Medical Care AG is a holding company whose subsidiaries operate kidney dialysis centers, provide homecare services and manufacture a complete line of dialysis products. Its headquarters are located in Germany.
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