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Related Issuers
Rating Action:

Moody's assigns B1 CFR to Kindred Healthcare; rates new term loan Ba3; outlook is stable

14 Mar 2011

$700 million of debt rated

New York, March 14, 2011 -- Moody's Investors Service assigned a B1 Corporate Family and Probability of Default Rating to Kindred Healthcare, Inc. (Kindred). Moody's also assigned a Ba3 (LGD3, 38%) rating to the company's proposed $700 million term loan due 2018. Concurrently, Moody's assigned a Speculative Grade Liquidity Rating of SGL-2. Moody's understands that the proceeds of the credit facility along with a proposed $600 million senior secured asset-based revolving credit facility (not rated by Moody's) and a contemplated offering of unsecured notes will be used to fund the acquisition of RehabCare Group, Inc (RehabCare) and to refinance Kindred's existing debt. We understand that Kindred has commitments for a $550 million senior unsecured bridge should the contemplated note offering not be completed prior to the closing of the acquisition of RehabCare. The ratings outlook is stable. The ratings of RehabCare were unchanged. We expect to withdraw the RehabCare ratings upon the acquisition of the company by Kindred, at which time RehabCare's debt will be retired.

The rating actions are subject to the conclusion of the transaction, as proposed, and Moody's review of final documentation.

Following is a summary of the ratings assigned to Kindred:

$700 million senior secured term loan due 2018, Ba3 (LGD3, 38%)

Corporate Family Rating, B1

Probability of Default Rating, B1

Speculative Grade Liquidity Rating, SGL-2

Following is a summary of the ratings of RehabCare which are unchanged and will be withdrawn at the close of the transaction:

$125 million senior secured revolver due 2014, Ba3 (LGD3, 30%)

$450 million senior secured term loan due 2015, Ba3 (LGD3, 30%)

Corporate Family Rating, Ba3

Probability of Default Rating, B1

Speculative Grade Liquidity Rating, SGL-2

RATINGS RATIONALE

Kindred's B1 Corporate Family Rating reflects the increased scale and diversity of the combined company and its position as the largest post-acute care service providers. Kindred gains significant scale in both the skilled nursing and hospital rehabilitation markets and further strengthens its LTAC hospital business with the acquisition of RehabCare. Additionally, while the current transaction results in an increase in the company's debt load we expect the company to focus on reducing leverage following the transaction given historically conservative leverage levels. Free cash flow generation is also expected to be modest in the near term as ongoing capital projects are completed. Furthermore, the rating considers the high reliance on the Medicare program related to the company's LTAC hospitals, which will be the predominant revenue and earnings contributor of the combined company.

The stable rating outlook reflects the expectation of near term reimbursement stability in the hospital segment but also contemplates reimbursement pressures in other segments in which the company operates. We expect the company to focus on debt reduction following the transaction and anticipate an increase in excess cash flow following the completion of certain capital investment initiatives, which could be used for greater voluntary debt reduction. The company also benefits from its position as the largest post-acute healthcare services companies.

The SGL-2 Speculative Grade Liquidity Rating reflects our expectation that the company will have good liquidity over the four quarters following the transaction characterized by sufficient cash flow to fund all working capital and capital spending needs. While we expect that the company will use a portion of the revolver to fund the acquisition of RehabCare, we anticipate that remaining revolver availability will be adequate.

If the company is unable to mitigate negative reimbursement developments impacting its contract therapy customers, experiences greater than expected pressures in the hospital business or sees integration issues materially impacting earnings and cash flow, we could downgrade the ratings. More specifically, we could downgrade the ratings if leverage was expected to increase and be sustained above 5.0 times or free cash flow to debt was expected to be sustained below 3%.

We could upgrade the ratings if leverage was expected to be sustained below 4.5 times and free cash flow to debt was expected to be sustained above 5%, as a result of continued growth, operational improvements and/or debt repayment. Additionally, we would have to gain comfort in longer term reimbursement stability in order to take a positive rating action.

For further details, refer to Moody's Credit Opinion for Kindred Healthcare, Inc. on Moodys.com.

The principal methodologies used in this rating were Global For-Profit Hospital Industry published in September 2008, and Loss Given Default for Speculative-Grade Non-Financial Companies in the U.S., Canada and EMEA published in June 2009.

This is the first time Moody's has assigned a rating to Kindred.

The last rating action on RehabCare Group, Inc. was on November 4, 2009, when Moody's assigned a Ba3 Corporate Family Rating and a B1 Probability of Default Rating, a Ba3 rating to the senior secured credit facility and an SGL-2 Speculative Grade Liquidity Rating.

Kindred operates hospitals, nursing and rehabilitation centers, assisted living facilities and a contract rehabilitation services business across the United States. At December 31, 2010, the hospital division operated 89 LTAC hospitals in 24 states. The nursing center division operated 226 nursing and rehabilitation centers and seven assisted living facilities in 28 states. The company also operated a contract rehabilitation services business that provides rehabilitative services primarily in long-term care settings. For the year ended December 31, 2010 the company recognized revenues of approximately $4.4 billion.

RehabCare provides rehabilitation program management services in hospitals, skilled nursing facilities, outpatient facilities and other long-term care facilities. In partnership with healthcare providers, the company provides post-acute program management, medical direction, physical therapy rehabilitation, quality assurance, compliance review, specialty programs and census development services. The company also owns and operates 29 LTAC hospitals and five rehabilitation hospitals, and provides other healthcare services. For the year ended December 31, 2010, the company recognized revenues of approximately $1.3 billion.

REGULATORY DISCLOSURES

Information sources used to prepare the credit rating are the following: parties involved in the ratings, parties not involved in the ratings, public information, and confidential and proprietary Moody's Investors Service information.

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.

New York
Lenny J. Ajzenman
Senior Vice President
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

New York
Dean Diaz
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's Investors Service
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JOURNALISTS: 212-553-0376
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Moody's assigns B1 CFR to Kindred Healthcare; rates new term loan Ba3; outlook is stable
No Related Data.
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