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NDCHealth Has Negative Diagnosis; Bally Postpones Filing

12 Aug 2004

Atlanta-based NDCHealth Corp. could face higher interest costs if it is downgraded by Standard & Poor's or its leverage levels get too high.

Atlanta-based NDCHealth Corp. could face higher interest costs if it is downgraded by Standard & Poor's or its leverage levels get too high. The agency has placed the outlook of NDCHealth on negative from stable as the company will likely experience relatively lower operating profitability levels over the near term, notes S&P. The BB- corporate credit and senior secured bank loan ratings, and the B subordinated debt rating, have been affirmed.

NDCHealth has a $225 million senior credit facility, consisting of a $100 million five-year revolver and a $125 million six-year term loan. NDCHealth is currently in compliance with all restrictive covenants, however, it does not expect to meet certain covenant requirements and will need to request a waiver or obtain an amendment from its credit group, according to the company's most recent annual report.

Last year, NDCHealth amended the $125 million term loan to reduce the interest rate from LIBOR plus 4% with a 2% LIBOR floor to LIBOR plus 2 3/4% with no floor. The revised credit agreement also eliminated and relaxed certain covenants and reduced the rate on the revolver by 50 basis points to LIBOR plus 2 1/2%. The spread can vary according to NDCHealth's leverage position and credit ratings.

While sales declined by 3%, to $111 million in the last quarter, EBITDA margins fell to approximately 20% in the quarter from about 30% in most quarters over the past two years. While total debt-to-EBITDA was about three times at May 2004, total debt-to-EBITDA could rise to the four times range over the intermediate term.

NDCHealth faces a number of challenges across several business units, which together are expected to lower profitability. These include challenging market conditions in the company's information management business and uncertain sales growth rates for new pharmacy systems. A spokeswoman for NDCHealth did not return calls by press time.

Moody's Investors Service has placed the ratings of Bally Total Fitness Holding Corp. on review for possible downgrade after Bally postponed filing its second quarter 10-Q report due to accounting issues. The review includes Bally's $100 million senior secured revolver, which is rated B1 and is led by J.P. Morgan. The credit was put in place last year and the syndicate includes LaSalle Bank, Deutsche Bank, GE Capital, US Bank, Wells Fargo Bank and Bank One. The review also includes Bally's $235 million of 10 1/2% senior unsecured notes rated B2 and $300 million of 9 7/8% senior subordinated notes rated Caa1.

Moody's is concerned that the accounting issues that need to be addressed may not be resolved in time to prevent an event of default. Bally has obtained the consent of its lenders allowing until Sept. 30 to file its 10-Q for the second quarter, without the delayed delivery constituting a default under its revolving credit facility. A Bally spokesman declined comment on actions by the rating agency.

Moody's notes that the revolving credit facility and senior unsecured notes are expected to have relatively high recovery values in the event of a default due to Bally's expected enterprise value and the value of its real estate and receivables.

12 Aug 2004