Moody's downgrades IHS debt.
(Press release provided by Moody's Investors Service).
NEW YORK, Moody's Investors Service assigned a Ba3 to
Integrated Health Services' ("IHS") $1.75 billion senior secured
credit facilities and a B2 to the company's new $250 million
senior subordinated notes due 2008.
Moody's also downgraded to B2 IHS's existing senior
subordinated notes totaling approximately $600 million and
downgraded to B3 the $259 million of convertible debentures.
The outlook for the rating is stable.
This rating action reflects Moody's concern about the
company's continued rapid growth through acquisitions. The
acquisition risk is further complicated by the fact that RoTech
itself has been growing rapidly through acquisitions.
Additionally, IHS is increasing the size of its bank
facility and issuing new senior notes in order to provide it
with $1 billion available for the purpose of making future
acquisitions.
This amount of availability concerns Moody's both in terms
of future integration risk and, despite its track record of
using equity to finance a portion of its acquisitions, the
company is now positioned to complete sizable transactions
using solely debt.
The rating further reflects that there are significant
changes underway in the reimbursement of services rendered by
IHS, and the exact impact of these changes is uncertain.
Moody's also notes that the acquisition strategy which the
company has pursued to date has resulted in negative tangible
equity of $114 million, making no adjustment for the $259
million of convertibles.
Goodwill accounts for roughly 40% of total assets on a
pro-forma basis and, even including the issuance of over $500
million in equity for the acquisition of RoTech, adjusted debt
(including operating leases) to total capitalization following
the transactions but before drawing down on the $1 billion of
availability, is over 70%.
Additionally, the company, on a pro-forma combined basis,
has only $86 million of retained earnings on pro-forma revenues
of $2.3 billion and the return on assets is below 10%. Moody's
rating does, however, recognize that the company has a
track-record of integrating acquisitions, has opted to use
equity as a means of financing a portion of certain
acquisitions over the past five years thereby keeping its total
debt to capital below 70% (the company has not, however, issued
equity on the public market since 1994), and there could be
benefit to IHS in its negotiations from having the ability to
make an offer without a financing contingency.
Moody's also notes that the company has an established
anti-fraud program (expanded in conjunction with the First
American acquisition), and conducts extensive due diligence
prior to the consummation of an acquisition.
Moody's also recognizes that the company is striving to
position itself to benefit from the introduction of a
prospective payment system relating to the rendering of home
healthcare services.
Integrated Health Services is a holding company
headquartered in Owings Mills, Maryland offering post-acute
services which include home nursing services, home infusion
services, subacute care, inpatient and outpatient
heabilibation, respiratory therapy, hospice care, and
diagnostic services.
IHS currently operates over 1000 post-acute service
locations in 41 states.
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