S&P may downgrade Select Medical

Standard & Poor's said it placed its ratings for Select Medical Corp. on CreditWatch with negative implications, including the B+ corporate credit rating, BB- secured bank loan rating with a recovery rating of 1, B- subordinated debt rating and Select Medical Holdings Corp.'s B- senior unsecured debt rating.

This follows the announcement of The Centers for Medicare & Medicaid Services' proposal to reduce Medicare reimbursement to long-term acute care hospitals in fiscal 2007. If enacted as proposed, Medicare reimbursement to proprietary long-term acute care hospitals could fall an average of about 10.4%.

Because about 72% of Select's long-term acute care revenues are derived from Medicare, this cut would have a sizeable adverse impact, estimated by S&P to be about $90 million in revenues (or about 25% of EBITDA). The company's free cash flow might be eliminated and its credit protection weakened. S&P's preliminary analysis estimates that Select's lease-adjusted debt to EBITDA could increase to about 5.9x from its current level of about 4.5x.

This decline would occur at the same time that the company is in the process of implementing changes and making investments in several of its hospitals in order to become fully compliant with regulatory changes for its hospitals that are located in host hospitals, the agency said.

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