TEXT - S&P on Genesis Healthcare

Fri Dec 14, 2012 3:30pm EST

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(The following statement was released by the rating agency)

Overview
     -- U.S. skilled nursing facility operator Genesis HealthCare has sold the 
Solomar Hospice business it acquired from Sun Healthcare for $85 million.
     -- Sale proceeds have been used to reduce the senior secured term loan 
from $325 million to $250 million. As a result, our recovery rating has been 
revised to a '2' from a '3'. The issue-level rating has been upgraded to a 
'B+' from 'B', in accordance with our notching criteria.
     -- Our 'B' corporate credit rating and stable outlook remain unchanged.
     -- Our stable outlook reflects our expectation that credit protection 
measures will largely be unchanged through 2012, as the company integrates 
Sun's business and continues to successfully navigate the 2012 reimbursement 
cuts.

Rating Action
On Dec. 14, 2012, Standard & Poor's Ratings Services revised the recovery 
rating on Kennett Square, Pa.-based nursing home operator Genesis Healthcare 
LLC's senior secured term loan to '2' from '3', indicating our expectation of 
substantial (70%-90%) recovery for lenders in the event of a payment default, 
after the company repaid a portion of the debt with proceeds from the sale of 
Sun Healthcare's hospice business. The issue-level rating has been upgraded to 
a 'B+' from 'B', in accordance with our notching criteria. Our 'B' corporate 
credit rating and stable outlook remain unchanged 

Rationale
Our rating on Genesis reflects our assessment of the company's business risk 
profile as "weak" and the financial risk profile as "highly leveraged," 
according to our criteria. With the integration of Sun's facilities, we expect 
revenue of approximately $4.8 billion for 2013, reflecting the full-year 
effect of the Sun acquisition, and an approximate 2% increase in 2013 
reimbursement rates for skilled nursing facilities. Because of uncertainty 
associated with the mandated reimbursement cut in 2013 of up to 2%, as 
required under the Budget Control Act of 2011, we have not incorporated a 
reimbursement reduction into our estimates for 2013. However, a 2% cut in 2013 
would not be significant enough to alter our ratings or outlook. We expect 
adjusted EBITDA margins of between 14%-15%, reflecting our adjustment for 
operating leases. We believe unadjusted EBITDA margins will improve slightly 
in 2013 as synergies are realized, but will remaining in the low-single-digit 
area.

We view Genesis' financial risk profile as highly leveraged, reflecting our 
forecast for adjusted debt to EBITDA of about 10x in 2013. This estimate 
includes our assumption for a 2% increase in 2013 reimbursement rates and the 
full-year impact of integrating Sun. We include Genesis' on-balance-sheet 
financing obligation, the aggregate consideration for the 2011 sale and 
subsequent leaseback of the majority of its properties to Health Care REIT, as 
debt. Similarly, we adjust our leverage calculation to include the effect of 
Sun's operating leases, but this lease will not be reflected on Genesis' 
balance sheet in future. These adjustments add approximately 6.5x leverage to 
our 2013 forecast. Despite the high adjusted leverage, and the $75 million 
term loan paydown has minimal effect on our adjusted leverage calculations. We 
expect Genesis to generate approximately $40 million to $50 million of free 
operating cash flow (FOCF) in 2013. We do not expect it to make any further 
material acquisitions or pay any shareholder dividends.

We view Genesis' business risk profile as weak because of significant 
reimbursement issues we believe will remain a chronic risk despite its size, 
scale, and increased diversity. Diversity comes from over 400 facilities in 30 
states and approximately 15%-20% of pro forma revenues likely to come from 
rehabilitation and other business lines such as staffing services. Government 
reimbursement risk is the most significant credit factor because the company 
derives nearly 70% of its revenue from government sources. We believe the 
uncertainty of federal efforts to reduce health care spending and Genesis' 
relatively narrow business focus also subjects the company to ongoing federal 
regulatory and reimbursement risk. Its presence in 30 states helps insulate it 
from any single state reimbursement cut. The weak business risk profile also 
recognizes the increasing competitiveness of the nursing home industry, with 
pressure coming not only from other skilled nursing facilities, but also from 
other kinds of institutions such as inpatient rehabilitation hospitals.

Liquidity
Genesis' liquidity is "adequate." Sources of cash are likely to exceed uses 
over the next 12 months. Relevant aspects of Genesis' liquidity are:
     -- We believe sources will cover uses by over 2.5x during the next 12 
months;
     -- We expect sources of cash to be approximately $25 million of cash on 
its balance sheet, access to its $425 million asset-based revolving credit 
facility (subject to borrowing base availability) and approximately $40 
million to $50 million of discretionary cash flow in 2013;
     -- There are no significant debt maturities for the next 12 to 24 months;
     -- Uses include capital expenditures of approximately $80 million per 
year, with minimal acquisition activity of approximately $20 million;
     -- A 20% to 25% cushion on financial maintenance covenants; and
     -- We do not believe Genesis can absorb a low-impact, high-probability 
event.

Recovery analysis
The rating on the $325 million term loan is 'B+' (one notch above the 
corporate credit rating) with a recovery rating of '2', indicating our 
expectation of substantial recovery (70% to 90%) in the event of a payment 
default. For the complete recovery analysis, see our recovery report on 
Genesis HealthCare LLC, published Aug. 2, 2012, on RatingsDirect.

Outlook
Our stable rating outlook on Genesis HealthCare incorporates our expectation 
that credit protection measures will largely be unchanged through 2013, as it 
integrates Sun's business. We could lower our rating if Genesis's business 
risk profile becomes more vulnerable, possibly because of additional adverse 
economic or regulatory changes in the company's key states or if margins 
decline unexpectedly. A number of factors could contribute to a margin 
decline, such as the inability to successfully mitigate further third-party 
rate cuts, a greater-than-expected increase in expenses such as labor costs, 
or an unforeseen reduction in Genesis' percentage of higher-reimbursed 
Medicare patients because of payor-mix shifts. We could raise the rating if 
Genesis can sustainably reduce leverage to below 5x. However, we believe the 
upside potential is minimal considering the large and growing nature of the 
company's operating leases and their impact on our adjusted leverage 
calculations.
Related Criteria And Research
     -- Business Risk/Financial Risk Matrix Expanded, Sept. 18, 2012
     -- Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011
     -- Use Of CreditWatch And Outlooks, Sept. 14, 2009
     -- Criteria Guidelines For Recovery Ratings, Aug. 10, 2009
     -- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008
     -- 2008 Corporate Criteria: Rating Each Issue, April 15, 2008
     -- 2008 Corporate Criteria: Ratios And Adjustments, April 15, 2008
Ratings List
Ratings Affirmed

Genesis HealthCare LLC
 Corporate Credit Rating                B/Stable/--        

Upgraded
                                        To                 From
Genesis HealthCare LLC
 Senior Secured
  Local Currency                        B+                 B 
  Recovery Rating                       2                  3

 (Caryn Trokie, New York Ratings Unit)
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