S&P raises Select Medical outlook

Standard & Poor's raised its outlook on Select Medical Corp. to positive from stable and confirmed its ratings including its subordinated debt at B.

S&P said the outlook change indicates that it could raise Select Medical's ratings if the long-term acute-care hospital chain sustains improving financial performance as its hospitals transition to a new Medicare reimbursement system.

By using a strategy that includes a combination of acquisitions and new development, Select Medical has established itself as the second-largest operator of specialty acute-care hospitals for long-term-stay patients in the United States, and the second-largest operator of outpatient rehabilitation clinics.

Expansion and improvement of physician-referral relationships and the development of about eight to 10 new hospitals per year are key growth strategies, S&P said. Expanding programs and services, new clinic development, and acquisitions will fuel more modest growth in outpatient rehabilitation clinics.

However, the company remains vulnerable to changes in reimbursement. Although it appears that Medicare's prospective payment system for long-term acute-care will be favorable for the company, future adverse changes could have a significant impact as Medicare contributes 40% to Select Medical's total revenues, S&P said. The currently favorable managed-care environment is expected to moderate over the next year or two. Moreover, the company's acquisition plan could accelerate, hurting credit strength.

Still, the company's financial profile has been improving for the past two years, aided by a new equity offering in 2001, S&P said. Lease-adjusted debt to capitalization has been reduced to 59%, as of Dec. 31, 2002, from about 69% in 2000. Moreover, its funds from operations to lease-adjusted debt of 30% is solid for the rating, as is the 3.4x EBITDA interest coverage.

Moody's puts Japanese bank preferreds on review

Moody's Investors Service put the preferred stock and securities issued by subsidiaries of major Japanese banks and Tier III securities rating of UFJ Bank on review for downgrade including Mizuho JGB Investment LLC's preferred stock at Baa2, Mizuho Preferred Capital Co. LLC's preferred stock at Baa2, SB Treasury Co. LLC's preferred stock at Baa2, Tokai Preferred Capital Co. LLC's preferred stock at Baa2, TB Finance (Cayman) Ltd.'s preferred stock at Ba1, Sanwa International Finance (Bermuda) Trust's preferred stock at Ba1 and UFJ Bank Ltd.'s Tier III securities at Baa2.

Moody's said these banks' capitalizations are characterized by higher proportion of deferred tax assets and accordingly remain vulnerable to further deterioration of the operating environment.

Moody's said the range of possible outcomes could include adjustment of the rating by multiple notches.

The review was prompted by Moody's concern that ratings for junior capital securities of Japanese banks need to incorporate another source of uncertainty due to the emerging accounting regime for stricter assessment of deferred tax assets. Coupled with the continued weakening of the major banks' financial fundamentals and the declining flexibility of the government to provide coordinated overall support framework including timely pre-emptive capital injection before the drastic deterioration of regulatory capital deterioration of major banks, this may possibly lead to the relative increase of risk for junior capital obligations that qualify as Tier I regulatory capital.

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