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29 Sep 2010
Approximately $285 million of debt rated
New York, September 29, 2010 -- Moody's Investors Service assigned B1 Corporate Family and Probability
of Default Ratings to SHG Services, Inc. (SHG), a wholly
owned subsidiary of Sun Healthcare Group, Inc. SHG will comprise
the operating assets of Sun Healthcare Group following the current restructuring
of the company. Moody's also assigned a Ba2 (LGD2,
23%) rating to SHG's proposed senior secured credit facility,
consisting of a $60 million revolver and a $225 million
term loan. The rating outlook is stable. Finally,
Moody's assigned a Speculative Grade Liquidity Rating of SGL-2.
On May 24, 2010, Sun Healthcare Group announced a plan to
restructure the business by separating the real estate and operating assets
into two separate publicly traded entities. Under the terms of
the transaction, substantially all of the company's operations
will be held or assumed by SHG (which will ultimately be renamed Sun Healthcare
Group) while substantially all of the company's owned real property
and related mortgage indebtedness will be held or assumed by Sabra Health
Care REIT, Inc. (Sabra). SHG will enter into lease
agreements for the properties transferred to Sabra. The transaction
is expected to be completed in the fourth quarter of 2010.
The existing ratings of Sun Healthcare Group remain unchanged and are
expected to be withdrawn at the close of the transaction. Moody's
understands that the proceeds of the proposed SHG credit facility and
other debt to be issued by Sabra will be used to retire the existing debt
of Sun Healthcare Group.
Following is a summary of Moody's rating actions.
SHG Services, Inc.
$60 million revolver due 2015, Ba2 (LGD2, 23%)
$225 million term loan due 2016, Ba2 (LGD2, 23%)
Corporate Family Rating, B1
Probability of Default Rating, B1
Speculative Grade Liquidity Rating, SGL-2
Ratings unchanged and expected to be withdrawn at the close of the transaction:
Sun Healthcare Group, Inc.
Senior secured revolver due 2013, Ba2 (LGD2, 29%)
Synthetic line of credit, Ba2 (LGD2, 29%)
Senior secured term loan due 2014, Ba2 (LGD2, 29%)
Senior subordinated notes due 2015, B3 (LGD5, 84%)
Corporate Family Rating, B1
Probability of Default Rating, B1
Speculative Grade Liquidity Rating, SGL-2
SHG's B1 Corporate Family Rating reflects the moderate debt level but
still considerable adjusted leverage when considering Moody's adjustment
to capitalize operating leases, which is significant given the company
will not initially own any of the properties in which it has operations.
The rating also reflects the company's track record of organic growth,
which has contributed to improved margins and stable cash flow generation.
However, the ratings continue to reflect the risks associated with
the reliance on government programs for a significant portion of revenue.
Medicare reimbursement is expected to be impacted in the current year
by the adoption of the RUG-IV methodology and other changes that
could impact reimbursement for therapy services while Medicaid reimbursement
could see continued pressure as states are still faced with significant
If the company is able to continue to drive expansion in profitability
margins and cash flow through the implementation of the new Medicare reimbursement
rules, Moody's could consider changing the outlook to positive
or upgrading the ratings. More specifically, Moody's
would consider positive pressure on the ratings if adjusted debt to EBITDA
was expected to be sustained below 4.0 times and free cash flow
coverage of debt was expected to approach 10%.
Moody's could consider changing the outlook to negative or downgrading
the ratings if the company is unable to maintain adjusted debt to EBITDA
below 5.0 times because of either adverse reimbursement developments
or other operational issues. Additionally, Moody's
would consider negative pressure on the ratings if the company were to
incur additional indebtedness for acquisitions or development beyond our
expectations. If any combination of these factors were to result
in the expectation of sustained free cash flow to adjusted debt below
5%, Moody's could downgrade the ratings.
For further details, refer to Moody's Credit Opinion for SHG
This is the first time we are assigning ratings to SHG Services,
Inc. The last rating action on Sun Healthcare Group, Inc.
was on March 12, 2007 when the B1 Corporate Family and Probability
of Default Ratings were assigned along with ratings on the company's
senior secured credit facility and senior subordinated notes.
The principal methodology used in rating SHG Services, Inc.
was Loss Given Default for Speculative-Grade Non-Financial
Companies in the U.S., Canada and EMEA published in
June 2009. Other methodologies and factors that may have been considered
in the process of rating this issuer can also be found on Moody's website.
SHG Services, Inc. is a wholly owned subsidiary of Sun Healthcare
Group, Inc. Sun Healthcare Group is a leading provider of
healthcare services to seniors. At June 30, 2010, Sun
Healthcare Group's inpatient services division, SunBridge,
operated 116 skilled nursing centers, 16 combined skilled nursing,
assisted and independent living centers, 10 assisted living centers,
two independent living centers and eight mental health centers.
Sun Healthcare also provides rehabilitation services through its SunDance
division and healthcare staffing services through its CareerStaff Unlimited
subsidiary. Sun Healthcare recognized approximately $1.9
billion of revenue for the twelve months ended June 30, 2010.
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
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 SHG Services, Inc. B1; proposed credit facility rated Ba2
250 Greenwich Street
New York, NY 10007
No Related Data.
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