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Announcement:

Moody's changes Lifecare's outlook to stable and SGL rating to SGL-3

27 May 2011

Approximately $119 million of rated debt affected

New York, May 27, 2011 -- Moody's Investors Service changed Lifecare Holdings Inc.'s ("Lifecare") outlook to stable from negative and upgraded the speculative grade liquidity (SGL) rating to SGL-3 from SGL-4. The actions result from the reduced refunding risk and expectation for modest improvement in operating performance. Concurrently, we affirmed the Caa1 corporate family and probability of default ratings and Caa3 senior subordinated notes rating.

The following rating actions were taken:

Corporate family rating, affirmed at Caa1;

Probability of default rating, affirmed at Caa1;

$119.3 million senior subordinated notes, due 2013, affirmed at Caa3 (LGD6, 90%);

Speculative Grade Liquidity Rating, upgraded to SGL-3 from SGL-4.

The following ratings were withdrawn:

$255 million senior secured term loan, due 2012;

$60 million senior secured revolving credit facility, due 2011.

RATINGS RATIONALE

The Caa1 corporate family rating continues to reflect Lifecare's considerable pro forma debt leverage of approximately 7.1 times and limited interest coverage as measured by (EBITDA-CAPEX)/ Interest expense of 1 times for 2011. The ratios are calculated pro forma for the acquisition of 8 long-term acute care hospitals (LTACHs) that are expected to contribute about $10 million of annual EBITDA. The facilities will be financed with a $47 million incremental senior secured term loan (not rated by Moody's) and an $80 million sale-leaseback transaction with Healthcare REIT. Lifecare will not take title to the property. The rating also considers the company's reliance on the specialty hospital segment that results in a 60% Medicare revenue concentration. Further, Lifecare's absolute scale and size is moderate when compared to some of its competitors; it operates 28 facilities in 10 states (pro forma for the recent acquisition). High concentration by state and payor make the company susceptible to changes in Medicare payment schedules and event-risk related to a single facility.

The rating favorably reflects the company's competitive position in local markets, good EBITDA margins due to high acuity mix, and improvement in liquidity profile as reflected in the change of the SGL to SGL-3 from SGL-4. Lifecare's new credit agreement that was put in place in February 2011 increased headroom under financial covenants significantly. Nevertheless, the spread over LIBOR is considerable -- at 13.25% (company could choose to PIK 5.5%). In addition, by entering into the new credit agreement, the company eased the refunding risk as it extended the maturities of its debt obligations. The revolving credit facility and term loans are due in 2015 and 2016, respectively and the senior subordinated notes are due in 2013. However, the credit facilities have a springing maturity at May 15, 2013 that is triggered if the subordinated notes have not been refinanced, purchased, or defeased in full by May 15, 2013.

The change in the outlook to stable reflects the expectation that the company will modestly improve its debt leverage and interest coverage metrics through operational improvements such as improving clinical documentation and reducing accounts receivable days. Additionally, the fiscal 2012 proposal by Centers of Medicare and Medicaid (CMS) for Medicare reimbursement rates was a 1.2% net increase in the base rate, thus, we expect the rates to be relatively stable through next year and a half.

The ratings could be downgraded if (i) the company's free cash flow turns negative on a sustained basis (ii) the company's liquidity profile weakens due to the tightening of headroom under the financial covenants (iii) there are declines in Medicare reimbursement for 2012 or beyond or (iv) the moratorium ends in 2012 with adverse implications for the company's operating performance.

The ratings could be upgraded if debt to EBITDA was expected to be sustained below 6 times, interest coverage above 1.25 times, and free cash flow to debt above 3 percent. Additionally, there could be upward pressure if the company were to improve its occupancy rates and report a steady increase in patient visits.

The principal methodologies used in rating LifeCare 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.

Headquartered in Plano, TX, LifeCare operates 20 long-term acute care hospitals in nine states. The company's facilities include eight "hospital within a hospital" facilities ("HWH") and 12 free-standing facilities. In addition, the company holds a 50% investment in a joint venture for a long-term care hospital. LifeCare reported revenues of $358 million for the twelve months ended March 31, 2011.

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, confidential and proprietary Moody's Investors Service information, and confidential and proprietary Moody's Analytics information.

Moody's Investors Service considers the quality of information available on the issuer or obligation satisfactory for the purposes of maintaining a credit rating.

Please see ratings tab on the issuer/entity page on Moodys.com for the last rating action and the rating history.

New York
Tiina Siilaberg
Analyst
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

New York
Lenny J. Ajzenman
Senior Vice President
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 changes Lifecare's outlook to stable and SGL rating to SGL-3
No Related Data.
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