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Rating Action:

Moody's lowers Skilled Healthcare's ratings, places under review for possible further downgrade

Global Credit Research - 08 Jul 2010

Approximately $590 million of rated debt securities affected

New York, July 08, 2010 -- Moody's Investors Service lowered and concurrently placed under review for possible downgrade all of the ratings of Skilled Healthcare Group, Inc. ("Skilled Healthcare") in response to an exogenous event - namely, a $671 million verdict rendered against the company by a jury in Humboldt County, California. The corporate family and probability of default ratings were downgraded to B2 under review for possible downgrade, first lien credit facilities to B1 under review for possible downgrade, and senior subordinated notes to Caa1 under review for possible downgrade.

Today's ratings actions reflect our concerns about any potential impairments to business fundamentals and the ability of creditors to accelerate. Moreover, the review for possible downgrade will focus on the amount of damages that will be ultimately awarded to plaintiffs and the resulting impact on the company's operations and credit profile. In addition, the review will focus on Skilled Healthcare's ability to handle a possible bonding requirement and will consider the likely level of additional liabilities that could result from the ultimate verdict.

Moody's also downgraded Skilled Healthcare's speculative grade liquidity ("SGL") rating to SGL-4 from SGL-2 given the magnitude of the verdict received against the company in this first phase of deliberations relative to the company's liquidity position. Moody's has concern that, if an event of default were to occur due to or related to this verdict, the company could lose orderly access to its committed $100 million revolving credit facility. It is our expectation that Skilled Healthcare's cash position is minimal as the company usually keeps around $3 to $5 million of cash on hand.

On July 7, 2010 the company announced that a jury in Humboldt County, California returned a verdict against the company with initial damages awarded to plaintiffs amounting to $671 million. Reportedly, the $671 million is composed of $613 million in statutory damages and $58 million in restitutionary damages. The jury has not yet concluded on the punitive damages. According to the company's press release, the final judgment is expected to be announced in the next few weeks. At the time of the final judgment, the company will be required to post a bond for 150% of the final judgment amount.

The following rating actions were taken: (Loss Given Default Assessments are subject to change.)

Corporate family rating, downgraded to B2 from B1 and placed under review for possible downgrade;

Probability of default rating, downgraded to B2 from B1 and placed under review for possible downgrade;

$360 million Senior Secured First Lien Term Loan, due 2016, downgraded to B1 (LGD3, 38%) from Ba3 (LGD3, 37%) and placed under review for possible downgrade;

$100 million Senior Secured Revolving Credit Facility, due 2015, downgraded to B1 (LGD3, 38%) from Ba3 (LGD3, 37%) and placed under review for possible downgrade;

$130 million Senior Subordinated Notes, due 2014, downgraded to Caa1 (LGD6, 91%) from B3 (LGD6, 90%) and placed under review for possible downgrade;

Speculative grade liquidity rating, downgraded to SGL-4 from SGL-2.

The last rating action was on April 16, 2010 when Moody's upgraded the SGL rating to SGL-2 from SGL-3 and affirmed B1 corporate family rating.

Skilled Healthcare's ratings were assigned by evaluating factors we believe are relevant to the credit profile of the issuer, such as i) the business risk and competitive position of the company versus others within its industry, ii) the capital structure and financial risk of the company, iii) the projected performance of the company over the near to intermediate term, and iv) management's track record of tolerance for risk. These attributes were compared against other issuers both within and outside of Skilled Healthcare's core industry and Skilled Healthcare's ratings are believed to be comparable to those other issuers of similar credit risk.

Headquartered in Foothill Ranch, CA, Skilled Healthcare operates long-term care facilities and provides a variety of post-acute care services. The company operates skilled nursing facilities, assisted living facilities, hospice and home health locations. Further, the company provides ancillary services such as physical, occupational and speech therapy in its facilities and unaffiliated facilities and is a member of a joint venture providing institutional pharmacy services in Texas. Skilled Healthcare recognized revenues of approximately $761 million for the trailing twelve month period ended March 31, 2010.

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

New York
Kendra M. Smith
Managing Director
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's lowers Skilled Healthcare's ratings, places under review for possible further downgrade
No Related Data.
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