Moody's upgrades FHC Health loans

Moody's Investors Service said it upgraded FHC Health Systems, Inc.'s senior secured second-lien term loan due 2009 to Ba3 (LGD 2, 25%) from B2 (LGD 3, 48%) and senior secured third-lien term loan due 2010 to B3 (LGD5, 75%) from Caa1 (LGD 5, 88%). The B2 corporate family and probability-of-default ratings were affirmed.

The outlook is stable.

The upgrade follows the company's announcement that it amended and restated its prior purchase agreement with Psychiatric Solutions, Inc. Psychiatric intends to acquire Alternative Behavioral Services, Inc. from FHC for a cash purchase price of $210 million. Under the new agreement, FHC will dismiss its lawsuit against Psychiatric and Psychiatric is expected to withdraw its demand for payment for termination fees and other expenses. The deal is expected to close on Dec. 1.

The agency said the affirmation of FHC's ratings reflect the anticipated decline in leverage as Moody's assumes that FHC will use a majority of the proceeds from the sale of its ABS division to reduce outstanding debt and property mortgages. Moody's predicted that FHC's cash flow coverage of debt will improve and that the expected reduction in debt will significantly outweigh the loss of cash flow from operations and earnings from the ABS division.

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