Moody's Downgrades Kindred Healthcare (KND) CFR to 'B2'; Outlook is Stable

Moody's Investors Service downgraded the Corporate Family and Probability of Default Ratings of Kindred Healthcare, Inc. (NYSE: KND) to B2 and B2-PD from B1 and B1-PD, respectively. Moody's also downgraded the ratings on Kindred's senior secured debt to Ba3 (LGD 2) from Ba2 (LGD 2), and affirmed the B3 (LGD 5) rating on the company's senior unsecured notes. Finally, Moody's downgraded Kindred's Speculative Grade Liquidity Rating to SGL-3 from SGL-2. The rating outlook is stable.

"The downgrade of Kindred's Corporate Family Rating reflects our expectation that the company will have difficulty growing earnings over the next year, resulting in debt to EBITDA remaining close to 5.5 times," said Dean Diaz, Moody's Senior Vice President. "While Kindred's decision to exit the skilled nursing sector will reduce exposure to a challenging post-acute care segment, it will not meaningfully benefit the company's financial leverage or cash flow in the near term," continued Diaz.

The downgrade of Kindred's Corporate Family Rating results in an increase in the expected loss on the company's senior unsecured notes in the application of Moody's Loss Given Default methodology. However, that increase is not enough to change the instrument rating. Therefore, the rating on the unsecured notes is affirmed at B3 (LGD 5).

The stable rating outlook reflects Moody's expectation that Kindred will be able to mitigate much of the impact of the changing reimbursement methodology for long term acute care services through growth in other service lines, including hospice and homecare. However, the company will have to effectively execute a number of strategic initiatives in order to complete the exit of the skilled nursing business and realize cost savings from restructuring to return to growth in EBITDA.

The downgrade of the Speculative Grade Liquidity Rating to SGL-3 reflects Moody's expectation that the company will maintain adequate liquidity. However, declining EBITDA will constrain access to revolver availability and limit cushion with regard to covenant compliance levels.

Following is a summary of Moody's rating actions:

Issuer: Kindred Healthcare, Inc.

Ratings downgraded:

Corporate Family Rating downgraded to B2 from B1

Probability of Default Rating downgraded to B2-PD from B1-PD

Speculative Grade Liquidity Rating downgraded to SGL-3 from SGL-2

Senior Secured Bank Credit Facility downgraded to Ba3 (LGD 2) from Ba2 (LGD 2)

Ratings affirmed:

Senior Unsecured Regular Bond/Debenture affirmed at B3 (LGD 5)

The rating outlook is stable.

RATINGS RATIONALE

Kindred's B2 Corporate Family Rating reflects Moody's expectation that financial leverage will remain high at around 5.5 times over the next 12 to 18 months. The rating also incorporates Moody's consideration of risks associated with a high reliance on the Medicare program as a source of revenue and the ongoing changes to reimbursement of post-acute care services. Moody's also anticipates that the company will pursue acquisitions to fill out service line offerings in certain targeted markets while it undertakes considerable repositioning and restructuring efforts. However, the rating also reflects Kindred's scale as one of the largest post-acute care service providers by revenue and sites of service. Kindred will continue to have diversity by service line with a significant presence across many sub-segments of the post-acute care continuum even after the planned exit of its skilled nursing business.

Moody's could downgrade the ratings if the company is unable to sustain adjusted debt to EBITDA below 6.0 times or if negative developments in Medicare reimbursement in any of the company's subsectors are meaningfully detrimental to operating results. The ratings could also be downgraded if liquidity deteriorates or compliance with financial covenants becomes less certain.

The ratings could be upgraded if the company can effectively complete and realize the benefits of its repositioning and restructuring initiatives, navigate reimbursement headwinds, and maintain or expand EBITDA margins. The ratings could also be upgraded if adjusted leverage is expected to be reduced and sustained below 5.0 times.

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