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Global Credit Research - 13 Apr 2011
Approximately $1.575 billion of newly rated debt affected
New York, April 13, 2011 -- Moody's Investors Service assigned a B1 Corporate Family Rating
and B2 Probability of Default Rating to Drumm Investors LLC ("Drumm")
that is a holding company with operating subsidiaries doing business under
Golden Living brand name. In addition, the proposed $1.5
billion senior secured term loan and proposed $75 million senior
secured revolving credit facility were both rated B1. Drumm is
expected to use the proceeds from the term loan to primarily refinance
$1.3 billion CMBS and mezzanine debt that reside in its
property companies (PropCo's), an $110 million revolving
credit facility ($80 million drawn) and $96 million of other
debt that reside in its certain subsidiaries. The ratings outlook
The following rating actions were taken (LGD point estimates are subject
to change and all ratings are subject to the execution of the transaction
as currently proposed and Moody's review of final documentation):
Corporate Family Rating, assigned B1;
Probability of Default Rating, assigned B2;
$75 million Senior Secured Revolving Credit Facility, due
2016, assigned B1 (LGD3, 31%);
$1.5 billion Senior Secured Term Loan, due 2018,
assigned B1 (LGD3, 31%).
The B1 Corporate Family Rating considers Drumm's debt leverage and
the expectation that the company will use a large portion of its cash
flow for optional pre-payments under its proposed term loan.
We currently anticipate Drumm's debt leverage to be around 4 times
by the end of 2011 versus the pro forma 2010 level of 4.8 times.
The B1 rating also reflects expected good interest coverage [(EBITDA-CAPEX)-to-Interest
Expense] of approximately 3.5 times and free cash flow-to-debt
at around 8% for 2011. The projections are based on continued
modest improvement in census and favorable Medicare and Managed Care reimbursement
environment in 2011 while holding quality mix constant at around 30%.
In addition, mitigating the company's exposure to Medicaid
is its wide geographic diversity with presence in 39 states and District
of Columbia such that a substantial rate cut in any one state would not
materially affect the company's financial profile. The ratings
also benefit from the company's absolute size with projected revenue
base of over $2.8 billion in 2011 and new strategic initiatives
that could enhance revenue generation when fully implemented.
The rating is constrained by the company's reliance on government
reimbursement that may be reduced in 2012 and beyond. For fiscal
year 2011, Centers for Medicare and Medicaid (CMS) implemented a
new resource utilization grouping (RUG-IV) which was designed to
be budget neutral. However, Drumm benefits from the change
as many of its patients are higher acuity patients. Going forward,
it is uncertain whether CMS will refine the RUG-IV payment system
along with other possible reimbursement cuts. In addition to the
potential future reimbursement rate uncertainties, the company's
ratings are constrained by possible shareholder friendly activities.
The stable outlook reflects the expected good liquidity position and reduction
in debt leverage to below 4.5 times in the next twelve months.
The stable outlook also reflects the near-term visibility into
the reimbursement environment and the expectation for steady demand for
The rating could be downgraded or outlook changed to negative if the company's
leverage increases to and is sustained above 5 times and free cash flow-to-debt
decreases to below 5%.The rating could also be negatively
impacted if there are adverse developments in the reimbursement environment.
The ratings could be upgraded or outlook changed to positive if the company's
debt leverage declines below 4 times on a sustained basis and free cash
flow-to-debt increases to above 12% on a sustained
basis. In addition, for the ratings to be upgraded the company's
should exhibit improvement in EBITDA margins, skilled mix and quality
Drumm Investors LLC 's ratings were assigned by evaluating factors
that Moody's considers relevant to the credit profile of the issuer,
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. Moody's
compared these attributes against other issuers both within and outside
Drumm Investors LLC 's core industry and believes Drumm Investors
LLC 's ratings are comparable to those of other issuers with similar
credit risk. Other methodologies used include Loss Given Default
for Speculative Grade Issuers in the US, Canada, and EMEA,
published June 2009.
Drumm Investors, LLC through its wholly-owned subsidiaries
is a leading national provider of long-term care services.
As of December 31, 2010, Drumm's wholly-owned
subsidiaries operated 306 skilled nursing facilities (SNFs), 16
assisted living centers, and 79 hospice and six home health locations.
In addition, through its subsidiaries, Drumm operates a rehabilitation
therapy company, an administrative services company, as well
as certain other ancillary businesses. For 2010, Drumm reported
revenues of approximately $2.7 billion.
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.
Corporate Finance Group
Moody's Investors Service
Alexandra S. Parker
MD - Corporate Finance
Corporate Finance Group
Moody's Investors Service
Moody's Investors Service
Moody's assigns B1 CFR to Drumm Investors LLC; outlook stable
250 Greenwich Street
New York, NY 10007
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