Rotech Healthcare's bonds plummeted 11 points to 92 after the company said its revenues could be hurt by a new Medicare reimbursement rate for a drug called budesonide, an ingredient in Rhinocort Aqua nasal spray. The company says that if the new reimbursement rate is upheld by regulatory authorities, it would reduce its 2006 annual revenues by $30 million. Rotech is in talks with regulators to reverse the rate. Calls to Philip Carter, president and ceo, were not returned.
Arthur Henderson, an analyst at Jefferies & Co., said that with the company posting $110 million of EBITDA before the cut, a $30 million drop in revenues is a big hit. He added that it must make a projected $31 million of interest payments this year.
Henderson said the company has two classes of debt that it may have trouble paying interest on: $287 million of 9 1/2% senior subordinated notes and a $43 million senior secured term loan. "The company is not at risk of going bankrupt, but bond holders will be concerned," said Henderson. He added that the bank debt contains covenants determining minimum leverage ratios that may also be triggered.
Rotech reported net earnings of $5.5 million in 2005, compared with $36 million in 2004. It blamed the drop on Medicare reimbursement reductions. In January, Moody's Investors Service downgraded Rotech's senior secured credit facility to Ba3 from Ba2 and its senior subordinated notes to B3 from B2 because of the changes. According to Moody's, Medicare accounts for 65%-70% of Rotech's revenues.
Moody's says Rotech's credit facility has adequate protection if it becomes distressed. As of Sept. 30, Rotech had total assets of $1.03 billion, including $143 million of property, plant and equipment, $71 million of accounts receivable and $9 million in inventory.
