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07 Mar 2011
New York, March 07, 2011 -- Moody's Investors Service upgraded Rotech Healthcare Inc.'s
Corporate Family Rating ("CFR") and Probability of Default
Rating ("PDR") to B2 from Caa1 in connection with the proposed
refinancing of the company's senior subordinated notes due 2012
with a new $290 million of senior secured notes offering due 2018.
The new notes will be rated B3. In addition, Moody's
upgraded Rotech's existing 1st lien senior secured notes rating
to Ba2 from B1 and assigned an SGL-2 Speculative Grade Liquidity
Rating. The upgrade of the Corporate Family Rating two notches
to B2 reflects the alleviation of Moody's concerns regarding the
Rotech's liquidity profile as well as its view that the company
will be able to grow profitably despite the challenging reimbursement
environment. The rating outlook is stable.
Rotech Healthcare, Inc.:
Corporate Family Rating to B2 from Caa1;
Probability of Default Rating to B2 from Caa1;
$230 million senior secured first lien notes to Ba2 (LGD2,
17%) from B1 (LGD2, 19%);
$290 million senior secured 2nd lien notes due 2018 at B3 (LGD5,
Speculative Grade Liquidity Rating at SGL-2;
$287 million senior subordinated notes due 2012 at Caa2 (LGD5,
The outlook is stable.
The B2 Corporate Family Rating reflects Moody's expectation that
the company will continue its trend of improving credit metrics through
better operating performance and small strategic acquisitions.
Moody's expects credit metrics to be relatively weak, albeit
in line with the B2 rating with debt-to-EBITDA leverage
of approximately 4.9 times at the time of the transaction.
However Moody's also expects additional de-leveraging over
time through EBITDA expansion and the generation of modest free cash flow.
Interest coverage is likely to remain thin given the high cost of Rotech's
debt. Debt repayment is not anticipated due to the all bond debt
capital structure which does not contain pre-payment provisions.
Importantly, Rotech's new capital structure (1st and 2nd lien
secured notes due 2015 and 2018, respectively, $10
million revolving credit facility) alleviates previous concerns regarding
the company's maturity profile and liquidity.
However, the B2 rating also reflects the ongoing uncertainty regarding
reimbursement risk for oxygen and other home medical equipment service
providers, particularly in the current environment where many healthcare
related issues are being rethought. Nonetheless, the award
of contracts in 9 out of 9 competitive bidding areas (CBAs) in Round 1
of Medicare changes adds clarity to the company's 2011 and 2012
operating performance. Reimbursement rate cuts remain a longer
term risk and will be more severe in the Round 2 competitive bidding environment
slated for 2013.
Although not likely without greater clarity regarding Medicare reimbursement,
an upgrade could be supported by ongoing improvements in operations and
cost cutting which sufficiently offset the negative reimbursement environment.
Specifically, credit metrics supporting an upgrade would include
leverage sustained below 4 times debt-to-EBITDA and free
cash flow to debt approaching 10%.
If Rotech faces further, significant reimbursement cuts that are
not likely to be offset by additional cost cutting measures or market
share gains, ratings could be downgraded.
The last rating action for Rotech was on October 5, 2010 when Moody's
raised Rotech's Corporate Family Rating to Caa1 and rated the company's
senior secured first lien notes B1.
Rotech's ratings have been assigned by evaluating factors that Moody's
believes are relevant to the company's risk profile, such as the
company's (i) business risk and competitive position compared with others
within the industry; (ii) capital structure and financial risk;
(iii) projected performance over the near to intermediate term; and
(iv) management's track record and tolerance for risk. These attributes
were compared against other issuers both within and outside Rotech's core
industry. Rotech's ratings are believed to be comparable
to those of other issuers with similar credit risk.
The principal methodology used in this rating was Loss Given Default for
Speculative-Grade Non-Financial Companies in the U.S.,
Canada and EMEA published in June 2009.
Rotech, headquartered in Orlando, Florida, is one of
the largest providers of home medical equipment and related products and
services in the US, with a comprehensive offering of respiratory
therapy and durable home medical equipment and related services.
Rotech provides equipment and services in 48 states through approximately
425 operating centers located primarily in non-urban markets.
For the twelve months ended December 31, 2010, Rotech reported
revenue of approximately $496 million.
Information sources used to prepare the credit rating are the following:
parties involved in the ratings, parties not involved in the ratings,
public information, confidential and proprietary Moody's Investors
Service information, and confidential and proprietary Moody's
Moody's Investors Service considers the quality of information available
on the issuer or obligation satisfactory for the purposes of assigning
a credit rating.
Moody's adopts all necessary measures so that the information it uses
in assigning a credit rating is of sufficient quality and from sources
Moody's considers to be reliable including, when appropriate,
independent third-party sources. However, Moody's
is not an auditor and cannot in every instance independently verify or
validate information received in the rating process.
Please see ratings tab on the issuer/entity page on Moodys.com
for the last rating action and the rating history.
The date on which some Credit Ratings were first released goes back to
a time before Moody's Investors Service's Credit Ratings were fully digitized
and accurate data may not be available. Consequently, Moody's
Investors Service provides a date that it believes is the most reliable
and accurate based on the information that is available to it.
Please see the ratings disclosure page on our website www.moodys.com
for further information.
Please see the Credit Policy page on Moodys.com for the methodologies
used in determining ratings, further information on the meaning
of each rating category and the definition of default and recovery.
Senior Vice President
Corporate Finance Group
Moody's Investors Service
Peter H. Abdill, CFA
MD - Corporate Finance
Corporate Finance Group
Moody's Investors Service
Moody's Investors Service
Moody's Upgrades Rotech CFR to B2; 2nd lien Sr. Secured Notes Assigned B3
250 Greenwich Street
New York, NY 10007
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