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Rating Action:

MOODY'S CONFIRMS B1 RATING ASSIGNED TO BEVERLY ENTERPRISES, INC.'S PROPOSED $150 MILLION SENIOR NOTES OFFERING

07 Feb 1996
MOODY'S CONFIRMS B1 RATING ASSIGNED TO BEVERLY ENTERPRISES, INC.'S PROPOSED $150 MILLION SENIOR NOTES OFFERING New York, 02-07-96 -- Moody's Investors service confirmed the B1 rating assigned to Beverly Enterprises Inc.'s proposed $150 million of senior notes, due 2006. In December 1995 Beverly postponed the proposed issue. However, the company is marketing the issue again, and it has modified the indenture slightly.
The rating confirmation reflects the company's improving cash flow generation that has resulted from significant property dispositions in the recent past, favorable changes in Beverly's patient mix, increased generation of higher margin ancillary service revenues, expense controls and generally favorable reimbursement rates and labor markets. In spite of the improving cash flow generation, the rating also reflects the company's weak returns on its $2.5 billion asset base. Another negative factor which played a crucial role in the rating assignment is the relative ranking of the senior unsecured debt issue within the company's complex and highly-secured capital structure.
Adjusted for the recent exchange of the company's preferred stock into 5.5% convertible subordinated debentures, the consolidated capital structure as of September 30, 1995, included $1.1 billion of debt and $880 million of book equity (before considering $380 million of goodwill and the recently announced write-offs which exceed $100 million.) Much of this debt is located at Beverly Health and Rehabilitation, the company's nursing home operating subsidiary. Furthermore, even after the use of senior note proceeds to repay secured debt, almost $700 million of debt and capital leases (or almost 65% of total debt) will remain secured by approximately half of the company's owned nursing home properties and by the stock of its PCA subsidiary. Moody's added that 291 of the company's 706 nursing homes are financed through operating leases, and that the leased properties and the $97 million of annual rent associated with the properties are not reflected on the company's balance sheet. If capitalized, these leases would approximate another $800 million of secured debt financing. Moody's recognizes that the issuance of the senior unsecured notes at the holding company reflects management's intention to simplify the capital structure over time. However, the B1 rating on the proposed senior unsecured notes continues to reflect the significant amount of secured debt ahead of these holding company notes. The presence of guarantees by substantially all of the company's present and future subsidiaries only partially mitigates the lack of security.
The company's credit ratings were removed from Moody's published watchlist in December, 1995. However, the outlook for all of the company's credit ratings over the next 12-24 months remains negative because of Moody's concerns that a transaction involving the sale or spin-off of PCA will reduce the cash flows available to bondholders at the same time that shareholders could benefit from restricted payments. Recent acquisition integration problems at the subsidiary have postponed the transaction, but Moody's believes that the likelihood for the transaction in the intermediate future is high. The indenture contains a covenant which places some restriction on the transaction, and it would likely result in the paydown of some debt in order to complete the transaction. Under that covenant, the company could spin-off PCA only if: Beverly's fixed charge coverage ratio (pro-forma for the transaction) would not be reduced by more than 15% from Beverly's fixed charge coverage ratio for the trailing twelve months (approximately 3.3 times for the twelve months ended September 30, 1995), and if Beverly's debt to consolidated cash flow as of the date of the transaction would not be increased by 15% or more from Beverly's actual debt to consolidated cashflow (approximately 3.6 times as of September 30, 1995 and adjusted for the exchange of the preferred stock). In addition, an amendment to this covenant agreement requires that PCA satisfy all debt of PCA and its subsidiaries to Beverly and its subsidiaries. Nevertheless, Moody's emphasized that, if these conditions are met, up to $100 million of the proceeds could be used for restricted payments, directly benefiting the company's equity investors. While the recent amendment should extinguish the intercompany debt, it will not automatically lead to an extinguishment of the public debt that was incurred to fund Beverly's pharmacy acquisitions. At present, 16-17% of consolidated cash flows are generated by the PCA subsidiary. However, considering the significant amount of goodwill created in the buildup of the pharmacy subsidiary, Moody's stresses the fact that PCA represents 20-25% of consolidated EBITA, a measure which Moody's believes is a truer reflection of cash generation. Also, Moody's added that bondholders stand to lose one of the company's higher margin sources of cash once the integration difficulties at PCA are overcome. Finally, Moody's believes that management will remain pressured to improve its stock price as long as the company's asset returns lag those of its competitors.
Beverly Enterprises, Inc. is the largest domestic provider of nursing home care and related services. The company is headquartered in Fort Smith, Arkansas.

No Related Data.
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