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Global Credit Research - 01 Mar 2011
Approximately $400 million of rated debt affected
New York, March 01, 2011 -- Moody's Investors Service assigned a Caa2 (LGD5, 88%)
rating to American Renal Holdings Company, Inc.'s proposed
issuance of $125 million of senior PIK toggle notes due 2016.
The issuer is the parent holding company of American Renal Holdings,
Inc. (collectively American Renal). Concurrently,
Moody's lowered the Corporate Family and Probability of Default
Ratings at American Renal Holdings, Inc. to B3 from B2.
These ratings will be subsequently reassigned at the parent holding company
level, the highest level in the corporate structure with rated debt
upon the close of the transaction. Moody's also affirmed the ratings
of the senior secured notes at American Renal Holdings, Inc.
at B2 (LGD3, 35%) and lowered the rating of American Renal
Holdings, Inc.'s revolving credit facility to B1 (LGD2,
24%). Finally, Moody's also affirmed the SGL-2
Speculative Grade Liquidity Rating. The ratings outlook is stable.
Moody's understands that the proceeds of the proposed senior PIK
toggle notes will be used to pay a dividend to shareholders and pay fees
Following is a summary of Moody's rating actions.
American Renal Holdings Company, Inc.:
$125 million senior PIK toggle notes due 2016, Caa2 (LGD5,
American Renal Holdings, Inc.:
$25 million senior secured revolver due 2015, to B1 (LGD2,
24%) from Ba3 (LGD2, 23%)
Corporate Family Rating, to B3 from B2
Probability of Default Rating, to B3 from B2
Ratings affirmed/LGD assessments revised:
American Renal Holdings, Inc.:
$250 million senior secured notes due 2018, to B2 (LGD3,
35%) from B2 (LGD4, 53%)
Speculative Grade Liquidity Rating, SGL-2
The downgrade of American Renal's Corporate Family Rating to B3 reflects
the aggressive financial policy of the company characterized by the considerable
increase in leverage and decapitalization of the company following the
payment of the debt financed dividend. Moody's estimates that pro
forma leverage will increase in excess of 1.5 times the level incurred
when the ratings were initially assigned in April 2010 to over 7.1
times. The increase in leverage follows the recent improvement
in the leverage metrics resulting from the growth in the business since
we initially assigned the rating. However, despite the growth,
the rating also considers the still modest scale of the company and the
expectation that American Renal will use available cash flow to aggressively
grow through the development of de novo centers. Finally,
the rating considers risks associated with the focus on the dialysis services
marketplace and its high concentration of revenues from government based
programs, which were subject to a change in reimbursement methodology
on January 1, 2011. However, Moody's also considers
the company's unique position in its focus on developing centers in partnership
with practicing nephrologists, which has resulted in favorable operating
performance and relatively rapid maturation of newly developed centers.
The ratings also reflect the relatively stable business profile characterized
by increasing incidences of end stage renal disease (ESRD) and the medical
necessity of the service provided.
Upward pressure on the rating is somewhat limited in the near term because
of the expectation that the increase in leverage incurred with the payment
of the dividend to shareholders will not be materially reduced in the
near term. The rating also remains constrained by the relatively
small scale of the company. However, if the company improves
operating results or repays debt such that adjusted debt to EBITDA is
sustained below 5.5 times and free cash flow to adjusted debt is
around 5%, Moody's could change the outlook to positive or
upgrade the ratings.
If the company takes on additional debt to fund acquisitions or if the
bundled prospective payment system, which became effective January
1, 2011 unfavorably impacts American Renal's business model such
that leverage were to increase from current levels, Moody's could
change the outlook to negative or downgrade the ratings. Additionally,
sustained negative free cash flow from either operating difficulty or
investments in de novo centers that have a lower than expected or delayed
return could result in downward pressure on the ratings.
For further details refer to Moody's Credit Opinion for American Renal
Holdings Company, Inc. on moodys.com.
Moody's last rating action on American Renal was on April 21, 2010,
when we assigned ratings to the company for the first time in conjunction
with the acquisition of the company by Centerbridge Partners and management.
American Renal'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 American Renal's core industry and
American Renal's ratings are believed to be comparable to those other
issuers of similar credit risk.
American Renal is a provider of outpatient dialysis services to patients
with chronic kidney failure. At December 31, 2010,
American Renal operated 93 centers in 17 states and the District of Columbia.
The centers are jointly owned by nephrologist partners. The company
provides managerial, accounting, financial, technological
and administrative support services to the joint venture partners.
American Renal recognized between $304 million and $306
million in revenue for the year ended December 31, 2010.
The principal methodology used in this rating was Loss Given Default for
Speculative-Grade Non-Financial Companies in the U.S.,
Canada and EMEA published in June 2009.
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.
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service
Senior Vice President
Corporate Finance Group
Moody's Investors Service
Moody's Investors Service
Moody's rates American Renal's sr. PIK toggle notes Caa2; downgrades CFR to B3; affirms sr. secured notes at B2; outlook is stable
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