Moody's rates Renal Care

Moody's Investors Service said it assigned a Ba2 senior implied, Ba3 senior unsecured and B1 senior subordinated rating to Renal Care Group Inc. The senior subordinated rating reflects Renal Care's assumption of $160 million senior subordinated notes in the acquisition of National Nephrology Associates Inc.

This rating action concludes Moody's review of Renal Care and National Nephrology initiated Feb. 5 following Renal Care's announcement that it had signed a definitive agreement to acquire National Nephrology in a transaction valued at $345 million.

Moody's said the ratings reflect the company's increased leverage as a result of the National Nephrology acquisition coupled with the company's share repurchase program; Renal Care's focus on only one line of service, namely the provision of dialysis services to patients with end stage renal disease (ESRD); and revenue concentration from pharmaceutical products, namely Epogen distributed by Amgen.

The ratings also reflect integration risks associated with National Nephrology and the company's acquisition of Kidney MidWest in January 2004; high reliance on revenues from contracts with managed care payors who have significant negotiating power; significant government regulations required to maintain status as a Medicare/Medicaid provider; and a increasing amount of minority interest in consolidated cash flow owing to the company's operating model.

Moody's added the ratings also reflect Renal Care's leading position within the dialysis market with about 9% market share of a $15 billion domestic market; strong free cash flow generation estimated to be in excess of $150 million prior to de novo development and acquisitions; and stable industry dynamics as a result of consistent incidence of ESRD coupled with increased prevalence of diabetes, a leading cause of ESRD.

The ratings also reflect a relatively conservative capital structure with nearly 50% equity capitalization on a book basis; strong liquidity position with cash on the balance sheet and access to a $150 million revolving credit facility; industry leading quality indicators for mortality, hospitalizations, anemia management, and blood toxin removal; and broad geographic reach with operations in 30 states thus diversifying Medicaid concentrations.

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