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Rating Action:

MOODY'S ASSIGNS RATINGS OF Ba3 AND B1 TO BEVERLY ENTERPRISES, INC.'S SENIOR REVOLVING CREDIT FACILITY AND SENIOR UNSECURED NOTES.; RATING OUTLOOK REMAINS STABLE

11 Apr 2001
MOODY'S ASSIGNS RATINGS OF Ba3 AND B1 TO BEVERLY ENTERPRISES, INC.'S SENIOR REVOLVING CREDIT FACILITY AND SENIOR UNSECURED NOTES.; RATING OUTLOOK REMAINS STABLE

Approximately $955 Million of Debt Securities Affected.

New York, April 11, 2001 -- Moody's Investors Service assigned a B1 rating to Beverly Enterprises, Inc.'s ("Beverly") proposed Rule 144A $200 million senior unsecured notes and a Ba3 rating to the company's proposed $150 million senior revolving credit facility. The notes and the new revolving credit facility will be used to refinance the company's existing $375 million revolver. Moody's also confirmed the existing ratings of Beverly.

The ratings affected are as follows:

Assigned ratings:

· $200 million Senior Unsecured Notes, due 2009, rated B1

· $150 million Senior Revolving Credit Facility, due 2004, rated Ba3

Confirmed Ratings:

· $180 million 9% Senior Unsecured Notes, due 2006 at B1

· $20 million 8.75% First Mortgage Bonds, due 2008 at Ba2

· $30 million 8.625% First Mortgage Bonds, due 2008 at Ba2

· Senior Implied Rating at Ba3

· Senior Unsecured Issuer Rating at B2

Withdrawn Ratings:

· $375 million Senior Revolving Credit Facility due 2001

The outlook for the ratings remains stable.

The ratings reflect the company's leverage and modest interest coverage, its weak free cash flow, the increasing costs for labor, supplies and utilities, the challenges of operating in a highly competitive and regulated industry and the ongoing costs of conducting business in the state of Florida. Factors supporting the ratings include stabilizing operating trends, a more favorable reimbursement environment relative to recent years, favorable demographic trends and an anticipated improvement in the company's credit profile.

Over the past two years, Beverly's performance has suffered along with the entire long-term care industry during the transition to PPS. Revenue and EBITDA has declined and has led to a deterioration in credit statistics. While the company has survived the worst, and indeed looks strong relative to many of its peers, including several which filed for bankruptcy, it remains burdened with considerable debt. Leverage for FYE 2000 was high at 4.9 times (as measured by Total Adjusted Debt/EBITDAR), down slightly from 5.0 times for FYE 1999. Interest coverage for FYE 2000 was thin at 1.4 times (as measured by EBITDAR-Capex/(Interest + Rents)). The company also has additional obligations not incorporated into these statistics. The liabilities include about $70 million of off balance sheet medium term notes collateralized by accounts receivable and about $95 million due to the government stemming from the settlement of the government investigation into the company's Medicare cost reports ("the settlement"). In total, this increases the company's FYE 2000 balance sheet debt of $791 million by approximately 20.8%, and adjusted debt of $1.71 billion by 9.7%. (The company's synthetic lease of about $110 million is factored in through rent expense.)

Given the company's significant debt burden, Moody's is concerned over the company's modest cash flow. For FYE 2000, the company reported cash flow from operations of only $37 million, which represented approximately 5% of balance sheet debt. This amount was insufficient to cover capital expenditure of $76 million for the year. Cash flow for the year was reduced by a $30 million payment to the government as part of the settlement. Going forward, the impact of the settlement will be $18.1 million reduction annually through 2008. FYE 2000 cash flow was also hurt by a growth in accounts receivable, though early indications for FY 2001 is positive. Moody's anticipates that Beverly will improve its cash flow generation in the coming years, and when available, free cash flow will be used to reduce leverage.

With the passage of the Benefits Improvement and Protection Act of 2000 ("BIPA") this past December, the long-term care industry's woes relating to reimbursement issues have likely bottomed-out. Despite this positive, nursing homes are still under pressure, on the expense side, from the rising costs of labor and liability expenses. The problem of rising liability expense is particularly acute in Florida. Beverly has, however, announced that it intends to sell its Florida business as a result of the challenges of operating in that state. While visibility regarding the sale is minimal, Moody's expects the results to be positive for Beverly.

Supporting the ratings, Moody's notes that Beverly's operating trends have been relatively stable and even show some recent signs of improvement. The company, moreover, was hurt much less severely than many of its competitors following the Balance Budget Act of 1997. When many of the large national chains were increasing leverage to finance acquisitions and expansion of ancillary services prior to PPS, Beverly's management chose to be more conservative. The company focused on managing its portfolio of nursing homes, on cutting cost, and in preparation for PPS, on bringing services (such as rehabilitation therapy) in house and on the conversion to the new payment system. When PPS was implemented, Beverly was better positioned to absorb cuts in reimbursements and to adjust its cost structure to maintain margins. For FYE 2000, the company managed to produce EBITDAR margins of 13.3%, down only slightly from 13.9% in 1998. Occupancy has stabilized at 87% for FYE 2000 (87.2% for FYE 1999) and EBITDA has improved to $239 million from $224 million in 1999. Under the company's recently announced three-year plan, Moody's expects trends to improve modestly as the company streamlines its portfolio of nursing homes (25% of the company's nursing facilities consistently under-perform), re-engineers its management structure and seeks overall margin improvements through expanding its existing non-core businesses. The non-core businesses, including home health and contract therapy services, are higher margin, require lower levels of capital investments and presents better opportunities for growth.

Structurally, the Ba3 rating on the senior revolving credit facility reflects the security interest in nine properties together with a pledge of stock of certain subsidiaries. The ratings on the senior unsecured notes, which are guaranteed, reflect their effective subordination to certain mortgage debt and the company's outstanding receivable securitization program. Additionally, the ratings on the first mortgage bonds reflect the value of their collateral package.

Beverly Enterprises, Inc., headquartered in Fort Smith, Arkansas, is a leading provider of post-acute healthcare in the United States, operating 531 skilled nursing facilities, 34 assisted living centers, 165 outpatient clinics, and 58 home health and hospice agencies.

New York
Pamela Stumpp
Senior Vice President
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: (212) 553-0376
SUBSCRIBERS: (212) 553-1653

New York
Russell Pomerantz
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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