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19 Sep 2003
MOODY'S RATES BEVERLY ENTERPRISES' PROPOSED CREDIT FACILITIES Ba3 AND PLANNED SUBORDINATED NOTES ISSUE B2; OUTLOOK IS CHANGED TO NEGATIVE
Approximately $855 Million of Debt Securities Affected.
New York, September 19, 2003 -- Moody's Investors Service today assigned a rating of Ba3 to Beverly
Enterprises, Inc.'s ("Beverly") proposed
credit facilities and a B2 rating to its planned $100 million subordinated
notes issue. At the same time, Moody's confirmed the
existing ratings of the company and changed the outlook to negative.
Moody's is changing the outlook to negative to reflect the company's
credit profile's reduced ability to absorb the impact of negative
developments without a resulting ratings downgrade, given the deterioration
following the Medicare cliff. Moody's also notes that the
uncertainty surrounding the execution of Beverly's asset disposition program
is a concern, since the company's ability to retain current ratings
may be contingent upon its ability to delever through the program.
While problems are not anticipated, they may nonetheless arise.
If Beverly successfully completes its asset sales, however,
its credit statistics would likely improve to levels consistent with the
period prior to October 2002. Just as important, we expect
the company's exposure to patient care liability will be significantly
$75 Million Senior Secured Credit Facility due 2007,
$150 Million Term Loan B due 2008, rated Ba3
$100 Million Subordinated Notes, rated B2 (subject
to review of final terms and documentation)
$200 million 9.625% Senior Unsecured Notes
due 2009, rated B1
Senior Implied Rating at Ba3
Senior Unsecured Issuer Rating, upgraded to B1 ( consistent
with the company's senior unsecured notes' ratings)
Ratings to be Withdrawn:
$150 million Senior Revolving Credit Facility due 2004,
$180 million 9% Senior Unsecured Notes due 2006,
While the ratings are being confirmed, there are significant concerns
which limit the ratings on the company. These include the company's
high leverage, its high reliance on, and the unpredictability
of, government reimbursements, the continued surge in costs
for patient care liability insurance and the continued pressure expected
on wages and benefit expenses, particularly for nursing care due
to the nationwide shortages. Two of the issues, cuts in Medicare
rates and the jump in insurance expenses, recently combined to erode
Beverly's operating earnings significantly.
Positive factors supporting the ratings include the anticipated improvement
in leverage, management's relatively conservative approach
to financial management and the company's focus on improving operations
and reducing costs. Recently, operating trends within management's
control have been stabilizing or improving. Examples include the
increase in Medicare census, flat to slightly stronger occupancy
rates, improving DSO metrics and stability in wages and related
expenses as a percent of revenues. Further supporting the ratings
is the better than expected 6.26% increase in Medicare rates
set for the fiscal year beginning October 2003. The increase is
expected to contribute over $30 million to the top line,
and may signal greater government support for the industry.
The outlook for the company is negative because of the comparatively weak
credit metrics and the uncertainty surrounding the execution of the asset
disposition program. Should any adverse event occur in the near
term, the ratings may be downgraded. One concern is that
a higher than expected increase in insurance expenses could lead to a
deterioration in the company's performance. In addition,
should unexpected problems with the sale of assets develop, the
company's plan to delever may be impacted. Over the near term,
Moody's otherwise expects Beverly's operations to improve
modestly. We anticipate that modest rate increases and management's
continued focus on operations will support more consistent performance.
Should the company perform as anticipated, successfully execute
on its disposition program and lower leverage to anticipated levels,
a change in the rating outlook may be warranted.
Beverly is entering the new credit facilities and plans to issue subordinated
notes in order to replace its existing revolver and to refinance certain
of its debt obligations, including its senior unsecured notes due
2006. The ratings on the credit facilities take into consideration
the security package as well as the amount of secured debt in the capital
structure. The rating on the subordinated notes reflects its contractual
and effective subordination.
Following the refinancing, leverage at the company will remain mostly
unchanged from June 2003 levels. Leverage (Debt/EBITDA) based on
June 2003 LQA results was high in the low four times range, with
adjusted leverage (for 8x rent) materially higher at the mid five times
range. The figures compare unfavorably to 2001 and 2002 year-end
metrics, with leverage then in the mid-to-high three
times range and adjusted leverage near five times. However,
Moody's expects the ratios to come down materially within the next
12 months, with leverage likely approaching low-to-mid
three times, and adjusted leverage approaching high four times,
as the company reduces debt with proceeds from the sale of assets.
The credit statistics may continue to gradually improve going forward,
as Moody's believes management is committed to strengthening its
balance sheet and improving its credit profile. Ever since new
management joined Beverly, the company has keenly focused on reducing
debt, and has already reduced debt by about $300 million
since year-end 2000.
Cash flow, which in the past has been volatile, remains an
area of concern. Cash flow from operations for the near term is
expected to be weak, with free cash flow negligible. This
is, in part, due to the expected significant payments on accrued
patient care liabilities in excess of new accruals. However,
Moody's notes that this is a one-time issue related to the
company disposal of certain troubled facilities (the company will have
to make payments on claims arising in disposed facilities, but will
no longer generate cash flow at such facilities). We expect the
company's ability to generate cash flow on an ongoing basis to be
adequate, with free cash flow to total debt in the high single digit
range. We also expect Beverly's near term liquidity to be
strong in spite of negligible free cash flow. The company had $135
million in cash as of June 30, 2003, and will have an undrawn
$75 million revolver available following the refinancing.
The company will also generate significant cash proceeds from asset sales
over the near term.
In addition to generating cash and reducing leverage, one of the
key benefits expected from the asset disposition is the significant reduction
in exposure to patient liability insurance costs. In recent years,
expenses have been climbing at high double-digit rates.
By selectively selling certain homes with poor litigation track records
or in states with litigious environment, the company will be able
to reduce its expenses by about a half. The company is also anticipating
that growth in expenses will decline going forward. However,
Moody's is concerned that the litigation environment in the remaining
facilities and states may deteriorate.
The reimbursement environment has been and will continue to be a challenge
for the industry as well. Moody's, nonetheless,
is optimistic that Beverly will see modest increases in rates.
Medicare recently increased rates by 6.26%, including
a 3.26% adjustment to correct forecast errors in data used
to determine past market basket inflation updates. This may be
an indication that the government is more willing to address the industry's
concern over Medicare reimbursements. Medicaid rates for the company
have also been increasing, although it may come under increase pressure
as state governments continue to experience mounting deficits.
Beverly Enterprises, Inc., headquartered in Fort Smith,
Arkansas, is a leading provider of post-acute healthcare
in the United States, operating 456 facilities in 26 states and
Corporate Finance Group
Moody's Investors Service
William K. Lee
Corporate Finance Group
Moody's Investors Service
No Related Data.
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