Kindred Healthcare 'comfortable' with leverage after ReHab acquisition

By Paul Deckelman

New York, Sept. 14 - Kindred Healthcare, Inc. - which earlier this year acquired industry peer ReHab Care Group Inc. in a more than $1 billion deal largely funded with new debt - is "comfortable" with its current leverage, which is within its historical norm, and said its current liquidity profile affords it flexibility in its use of capital.

That's the view of D. Hank Robinson, the treasurer and senior vice president for taxes of the Louisville, Ky.-based company, which operates hospitals and nursing centers and provides contract rehabilitation services and in-home and hospice care across the United States.

He told attendees at the Morgan Stanley Global Healthcare Conference on Wednesday in New York that Kindred is in "a comfortable position for leverage. Actually, through outperformance in the first couple of quarters, we came in under the leverage number that we thought we'd end up with" following the ReHab Care transaction, which closed on June 1.

Pro forma for that transaction, the company projected that its fixed obligations - calculated using the rent on its various medical facilities multiplied by a factor of six and then adding in funded debt - would come out to around 4.6 times EBITDA.

Robinson said, however, that as of the end of the second quarter on June 30, the company was "a little bit below" the 4.5 times mark. He said that "ideally, I think we'd like to be around 4.25 [times]. But we've operated in a range between 4.25 and 4.75 [times] over the years and are comfortable operating in those ranges."

Facilities fund acquisition

Kindred announced on Feb. 8, 2011 that it would acquire St. Louis-based ReHab Care for roughly $35 per share in cash and stock, paying the company's shareholders $26 in cash plus 0.471 of a Kindred share for each ReHab Care share. Kindred would also assume $400 million of existing ReHab Care debt, bringing the transaction's total value up to $1.3 billion.

Kindred financed the acquisition via several debt transactions ahead of the closing.

In March, it lined up $1.35 billion of new bank-loan financing. There was a $700 million, seven-year senior secured term loan facility, which priced at 375 basis points over Libor with a 1.5% Libor floor and was sold at an original issue discount of 99, and a $650 million five-year asset-based senior secured revolving credit facility priced at Libor plus 250 bps.

The company also sold $550 million of 8¼% senior notes due 2019, which priced at par on May 20.

Kindred then used proceeds from the term loan, the revolver and the notes to pay the cash portion of the merger consideration, repay all amounts outstanding under its own and ReHab Care's existing credit facilities and to pay transaction costs.

Although the new debt boosted the company's outstanding debt load sharply - long-term debt rose to $1.43 billion as of June 30 from $365.5 million on Dec. 31, 2010, while debt payable within a year increased to $10.4 million at June 30 from $91,000 at the end of 2010 - Kindred said that the strong free cash flow the combined company would generate would provide it with the continued ability to delever.

Liquidity provides flexibility

Robinson said during his conference presentation that given the three major options for deployment of the company's capital - organic growth by investment in the business, doing acquisitions or delevering - "I think we take a fairly balanced approach on the need to take into account our ability to grow through some of these, and you need capital to do that. Our current facilities allow us significant flexibility in terms of access to liquidity as well as running the business."

Besides the availability under the new revolver left over after paying all of the expenses associated with the ReHab Care acquisition, including taking out both companies' existing credit facilities, the new Kindred term loan and revolver have incremental facility capacity totaling $200 million between them, subject to meeting certain conditions, including a specified senior secured leverage ratio.

Apart from borrowing capacity, Kindred had $52.4 million of cash and equivalents on its balance sheet at the end of the second quarter and $5.46 million of restricted cash. Accounts receivable totaled $944.7 million.

In August, Kindred announced that it would acquire Professional HealthCare, LLC, an Annandale, Va.-based provider of home health, hospice and private-duty nursing services and durable medical equipment, for $51 million in cash, to be funded out of operating cash flows and by drawing on its revolver. That transaction closed on Sept. 1.

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