Skilled Healthcare Group Inc. rating lowered to 'CCC' after adverse court decision

Standard & Poor's Ratings Services said today it lowered all its ratings on Foothill Ranch, Calif.-based nursing home operator Skilled Healthcare Group Inc. We lowered the corporate credit rating to 'CCC' from 'B+'. At the same time, we lowered the senior secured rating to 'CCC+' (one notch higher than the corporate credit rating) from 'BB-'. The recovery rating remains '2', indicating our expectation for substantial (70%-90%) recovery in the event of a payment default.
 
At the same time, we lowered the rating on Skilled Healthcare's subordinated debt to 'CC' (two notches below the corporate credit rating) from 'B-'. The recovery rating on this debt remains '6', indicating our expectation for negligible (0%-10%) recovery in the event of a payment default.
 
We placed all ratings on CreditWatch with developing implications. The CreditWatch listing follows the jury verdict against Skilled Healthcare related to a complaint filed more than four years ago.
 
A California jury has returned a verdict against Skilled Healthcare in the first phase of a case originally filed in 2006. The case related to a California statute that requires nursing homes to maintain 3.2 nursing hours per patient per day. The jury awarded the plaintiffs $613 million in statutory damages and $58 million in restitution. If the jury verdict is upheld in the final judgment, which is likely in a few weeks, Skilled Healthcare would be required to post a bond to satisfy a bonding requirement to defer enforcement of the judgment during a likely appeal process. The bonding requirement is typically to post a bond for 150% of the final judgment amount.
 
"We do not believe the company would have the means to post such a bond as it currently has only $94 million of borrowing capacity under its $100 million revolving credit facility," said Standard & Poor's credit analyst David P. Peknay, "with limited ability to draw on its credit facility due to covenant limitations." Skilled Healthcare has disclosed that the amount of the jury verdict exceeds the policy limits of its insurance.
 
"We expect to resolve the CreditWatch listing after the final judgment is rendered," said Mr. Peknay. If the jury verdict is upheld, we likely would lower the ratings, considering our belief that the company might seek bankruptcy protection. We could raise the rating if the final judgment removes the formidable financial challenge the company otherwise would face.