Fitch Rates Omega Healthcare Investors, Inc.'s Unsecured Term Loan 'BBB-'; Outlook Stable
Fitch Ratings has assigned a 'BBB-' rating to the $200 million unsecured term loan due 2017 entered into by Omega Healthcare Investors (NYSE: OHI; Omega). The loan bears interest at a rate based on the company's credit ratings and is currently priced at LIBOR + 175 basis points. At closing, the company had $100 million in borrowings under the term loan facility with up to 120 days to borrow the full amount available. Proceeds will be used to repay amounts outstanding on the line of credit facility and for future acquisitions. The term loan was entered into in conjunction with a new credit facility. The term loan and line of credit facility are subject to the same covenants as the previous credit facility.
Fitch currently rates Omega as follows:
--Issuer Default Rating (IDR) 'BBB-';
--Unsecured revolving credit facility 'BBB-';
--Senior unsecured notes 'BBB-';
--Subordinated debt 'BB+'.
The ratings reflect the strength of the company's metrics (low leverage, high fixed-charge coverage, stable cash flows and exceptional liquidity due to no near-term maturities), which offset the largest credit concern - the focus on skilled nursing and assisted living facilities. The high percentage of government reimbursement and the corresponding regulatory risk to operators of these facilities may place pressure on operator earnings. Additionally, Fitch notes the company's small size ($2.8 billion in assets), moderate geographic concentration (Florida and Ohio collectively comprise 32% of total investments) and exposure to smaller, un-rated operators.
Fixed-charge coverage is strong for the 'BBB-' rating. For the trailing 12 months (TTM) ended Sept. 30, 2012, OHI's fixed-charge coverage ratio was 3.1x, compared with 3.1x and 2.7x in full-year 2011 and 2010, respectively. Contractual rental escalators drive Fitch's expectation of fixed-charge coverage improving to 3.4x by 2014. Fitch defines fixed-charge coverage as recurring operating EBITDA less straight-line rents divided by total interest incurred and preferred dividends.
Leverage is also strong for the 'BBB-' rating and continues to decline. Leverage was 5.1x as of Sept. 30, 2012, as compared with 5.7x and 5.1x, respectively, as of Dec. 31, 2011 and 2010. Fitch forecasts that leverage will migrate to the mid-4.0x range through 2014 as the company acquires additional facilities funded evenly through debt and equity. Fitch calculates leverage as net debt-to-recurring operating EBITDA.
OHI's liquidity is exceptionally strong with no debt maturities before 2017 other than amounts outstanding on the unsecured revolving line of credit in 2016. The next maturity is the aforementioned $200 million term loan in 2017. OHI's back-ended debt maturities, coupled with the lack of recurring capital expenditures (due to the triple-net nature of the leases) provide exceptional liquidity coverage.
Offsetting the credit positives is OHI's focus on skilled-nursing facilities and assisted-living facilities, which are highly reliant upon federal and state reimbursement. More than 92% of OHI's operator revenues are derived from public sources as of June 30, 2012. Operators have experienced greater financial volatility and stress when rates and/or reimbursement formulas have changed. Healthcare legislation, together with budgetary concerns at both the federal and state levels will likely continue to pressure operator margins and operators' capacity to honor lease obligations
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