(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 were misstated)
-- 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 subordinated notes.
-- 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 debt.
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 years.
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.
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.