HealthSouth, Select Medical gain ground on reimbursement chatter; Angiotech upsizes, cuts spread

By Sara Rosenberg

New York, March 17 - HealthSouth Corp. and Select Medical Corp. saw bank debt levels rise over the course of the day as new talks on government reimbursement cuts are proving to be a bit more favorable to the companies.

And, in the primary, Angiotech Pharmaceuticals Inc. decided to increase the size of its term loan tranche while at the same time decreasing pricing, as the deal had been well received by the market.

HealthSouth and Select Medical were a touch stronger during Friday's market hours and have actually spent the last few days inching upwards, as government reimbursement talks have started again with things looking better for the companies than they first appeared a number of weeks ago, according to a trader.

HealthSouth's term loan B closed the session quoted at par ¾ bid, 101 offered, up from Thursday's levels of par 5/8 bid, par 7/8 offered and Wednesday's levels of par ½ bid, par 5/8 offered, the trader said.

Meanwhile, Select Medical's term loan B closed the session quoted at 99 bid, 99½ offered, up over the course of about two days from 98¼ bid, 99 offered, the trader continued.

"There were some reimbursement hearings on Capital Hill a while ago that affected this stuff. Apparently there have been some more meetings over the last few days and they softened on this cut of reimbursements," the trader explained.

Early on in February it was heard that the federal agency which administers Medicare - Centers for Medicare & Medicaid Services - had proposed cuts in reimbursement rates to long-term care providers that would reduce some government reimbursements by as much as 11%.

In other HealthSouth news, on Friday, the company revealed that it would be delaying its 10-K filing for the fiscal year ended Dec. 31, 2005. The company plans on completing the preparation of its financial statements by March 31.

In addition, HealthSouth said that it anticipates that its 2005 pre-tax loss will increase by about $260 million to $280 million from the prior year, principally resulting from the previously disclosed $215 million non-cash charge relating to its preliminary global litigation settlement, as well as the negative effect of the 75% Rule and recent inpatient rehabilitation facilities. The 75% Rule is a Centers for Medicare and Medicaid Services rule that limits the types of conditions that can be treated in an inpatient rehabilitation setting.

The filing delay and pre-tax loss increase on a year-over-year basis was seemingly brushed off by the loan market with investors choosing to focus on the reimbursements issue, the trader added.

HealthSouth is a Birmingham, Ala., provider of outpatient surgery, diagnostic imaging and rehabilitative health care services. Select Medical is a Mechanicsburg, Pa., operator of specialty hospitals.

Angiotech tweaks deal

Switching to the primary, Angiotech Pharmaceuticals upsized its term loan and reverse flexed pricing due to strong investor demand, according to a market source.

The seven-year term loan is now sized at $350 million, up from an original size of $300 million, and pricing has come down to Libor plus 150 basis points from original price talk at launch of Libor plus 175 basis points, the source said.

The company's $75 million five-year revolver was left unchanged in terms of size and pricing, which is initially set at Libor plus 175 basis points with a 50 basis point commitment fee, the source added.

Credit Suisse and Merrill Lynch are the lead banks on the $375 million credit facility (Ba3/BB-), with Credit Suisse on the left.

Proceeds from the credit facility will be used to help fund the purchase of American Medical Instruments Holdings Inc.

Under the acquisition agreement, Angiotech has agreed to purchase American Medical for approximately $785 million in cash, spit into about $676 million to American Medical shareholders and $109 million to refinance existing American Medical debt.

When the acquisition was announced, Angiotech had said that it also intended to issue about $300 million of subordinated notes in connection with the acquisition, although as a back-up for the bonds, the company got a commitment for $600 million in term loans.

In the end, the company decided to approach the high-yield market with only $250 million in senior subordinated bonds, which priced Thursday at par to yield 7¾%, so with the term loan upsizing that was recently announced, Angiotech did not actually take out any more debt than was originally accounted for.

In addition to the new debt, the company also plans on using about $200 million of cash on hand for acquisition financing.

Following the acquisition, total debt to EBITDA will be 3.6x, EBITDA to interest will be 4.0x, debt to equity will be 130%, debt to total capitalization will be 56% and net debt to total capitalization will be 41%.

Debt to EBITDA is anticipated to drop to 3.2x in 2006, 2.3x in 2007 and 1.4x in 2008, with the company hoping to have the senior term loan paid off in full by 2008, only leaving the $300 million of subordinated bonds outstanding.

The transaction is expected to close early in the second quarter, subject to customary closing conditions.

Angiotech Pharmaceuticals is a Vancouver, B.C.-based specialty pharmaceutical company. American Medical Instruments is a Lake Forest, Ill.-based manufacturer of a variety of single-use medical device products for specialty areas.

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