(The following statement was released by the rating agency)
Editor's note: In the previous version of this report published earlier
today, the ratings on Omnicare's convertible senior notes and subordinated debt
-- After a period of stable operating cash flow and improving operations,
Covington, Ky.-based Omnicare Inc. is refinancing some of its existing debt
with a new $350 million senior secured credit facility and $300 million of
-- We are revising our rating outlook on Omnicare OCR.N to stable from
negative, and affirming our 'BB' corporate credit rating on the company.
-- We are assigning our 'BBB-' senior secured debt rating and '1' recovery
rating to the company's proposed $350 million revolving credit facility. We are
assigning our 'BB' subordinated debt rating and '3' recovery rating to the
company's proposed $300 million of new subordinated notes.
In addition, we are revising our rating on the company's existing senior
subordinated notes to a '3' from '6', with an issue rating of 'BB', after a
significant reduction of senior secured debt. -- Our recovery rating on the
company's $977.5 million 3.25% convertible senior unsecured debenture remains a
'6', with an issue rating of 'B+'.
May 5 - Standard & Poor's Ratings Services said today that it revised its
rating outlook on Covington, Ky.-based Omnicare Inc. to stable from negative,
reflecting the company's recently improved operating performance, reduction in
term debt, and operating cash flow stability over the past three years, despite
numerous operating surprises. At the same time, we affirmed our 'BB' corporate
credit rating on the company.
We assigned our 'BBB-' senior secured debt rating and '1' recovery rating,
indicating our expectation for very high recovery (90%-100%) in the event of
default, to Omnicare's proposed $350 million senior secured revolving credit
facility maturing in 2015.
We also assigned our 'BB' subordinated debt rating and '3' recovery rating,
indicating our expectation for meaningful recovery (50%-70%) in the event of
default, to Omnicare's proposed $300 million of new subordinated notes.
We raised our recovery rating on the company's existing senior subordinated
debt issuances to '3' from '6', given the significant reduction of senior term
The '3' recovery rating reflects our expectation for meaningful recovery
(50%-70%) in the event of a default. The debt rating on the senior unsecured
debentures remains 'B+', with a recovery rating of '6' indicating our
expectation for negligible recovery (0%-10%) in the event of a default. (For
the complete recovery analysis, please our recovery report on Omnicare Inc., to
be published following this report on RatingsDirect.) Rationale "Our ratings on
Omnicare Inc. continue to reflect its narrow business focus, exposing it to
industry-specific risks, such as the potential for future reimbursement
pressure," said Standard & Poor's credit analyst Jesse Juliano.
In addition, Omnicare has experienced a number of operating shortfalls
since its debt-financed acquisition of NeighborCare Inc. in 2005, and the 2006
implementation of Medicare Part D.
These risks are partially offset by the company's opportunity to capitalize
on its leading position as a provider of pharmacy services to nursing homes and
other long-term care providers, its strong liquidity, and its ability to
generate free cash flow despite numerous operating hurdles over the past few
Omnicare achieved its leading market position through a long series of
acquisitions, typically using a mix of cash and stock. The company is
leveraging its larger size to achieve operational economies of scale and
improve its purchasing clout with pharmaceutical manufacturers. Given its broad
industry presence, it would be difficult for any national managed care company
to serve its nursing home and long-term care members without operating through
Omnicare has nearly completed its Full Potential Plan, which will
rationalize the company's distribution platform, move its operations to a
hub-and-spoke system, and install best practices throughout its network. We
believe this initiative could provide an annualized cost-savings run rate of
roughly $100 million.
Omnicare faces a variety of issues such as the potential for pricing
pressures from Medicare Part D and Medicaid; a substantial reimbursement
reduction by Omnicare's largest drug benefit plan provider, UnitedHealth Group
Inc., and an ensuing lawsuit; and the pressure to retain and win contracts with
nursing and long-term care organizations.