$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and will be withdrawn at the close of the transaction: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
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
Moody's assigns B1 CFR to Kindred Healthcare; rates new term loan Ba3; outlook is stable