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CHICAGO--([ BUSINESS WIRE ])--Fitch Ratings has affirmed the ratings of DaVita Inc. (DaVita) (NYSE: DVA), including the Issuer Default Ratings at 'BB-'. A full list of rating actions is at the end of this release. The Rating Outlook is Stable. The ratings apply to approximately $4.5 billion of debt outstanding as of March 31, 2012.

RATIONALE:

DaVita's ratings and Stable Outlook reflect the following:

--Fitch believes the roughly $4.4 billion ($3.66 billion cash/ $758 million stock) acquisition of HealthCare Partners is manageable operationally and financially for Davita. However, it will limit Davita's flexibility within the 'BB-' rating category.

--Davita generates strong free cash flow (FCF), has adequate internal liquidity and access to credit markets.

--Margins are sensitive to government payor reimbursement pressures and patient mix.

--The company's strong cash generation provides it with financial flexibility to pay down debt following leveraging transactions.

-- Total debt/EBITDA sustained above 4.0x could lead to a downgrade of the ratings.

--Pro forma for the debt funding of the acquisition, Fitch estimates reported gross debt-to-EBITDA of 4.8x and 3.8x when annualizing the contribution of Healthcare Partners EBITDA.

KEY RATING DRIVERS:

The key rating drivers for this credit are leverage measured as total gross debt-to-EBITDA, relative margin stability and FCF. The 'BB-' leverage range for this credit is approximately 3.5x-4.0x. Margin erosion of less than 250 basis points and material FCF generation are expected for this rating.

ACQUISITION TO EXPAND PRESENCE IN INTEGRATED CARE

The Healthcare Partners acquisition will broaden Davita's services beyond that of kidney disease. Both firms intend to share best practices in healthcare delivery, while remaining somewhat independent on an operating basis. Given Davita's historical focus on kidney patients, a less decentralized approach to managing Healthcare Partners which serves a broader patient population, will likely mitigate integration risk.

POST-TRANSACTION LEVERAGE TO LIMIT FINANCIAL FLEXIBILITY:

After the transaction closes, likely in the early part of the fourth quarter of 2012, Fitch expects pro forma gross leverage to increase to 3.6x-3.9x from 2.9x at March 31, 2012. This will limit Davita's financial flexibility within its 'BB-' rating category. Nevertheless, Fitch anticipates the company will reduce leverage in the 12-18 months following the transaction through a combination of debt paydown from solid FCF generation and growth in EBITDA. Fitch expects DaVita to operate with gross leverage of below 3.5x within 12 months following close of the acquisition.

ACQUISITIVE POSTURE:

Acquisitions remain a core component of the company's growth strategy, and it has completed two large ones (Gambro and DSI Renal Inc.) prior to its recently announced acquisition of Healthcare Partners. While the number of larger domestic targets has declined, Fitch believes the company will continue to pursue acquisitions in the healthcare service provider space, particularly in the kidney disease market, assuming the geographies and valuations are favorable. In addition, the Healthcare Partners transaction indicates that Davita will also consider providers that offer a broader array integrated healthcare services.

CASH-GENERATING BUSINESS MODEL:

DaVita's business model offers long-term, profitable growth, with demand that is fairly resistant to economic downturns. Relatively low fixed costs, manageable capital spending requirements and somewhat stable margins drive consistently strong cash flow. As such, Fitch expects DaVita to generate $550 million to $650 million in FCF during 2012. Fitch expects Healthcare Partners will also support the company's cash flow, which should be sufficient to fund targeted acquisitions and share repurchases while still reducing debt post-acquisition.

MARGINS SUSCEPTIBLE TO GOVERNMENT REIMBURSEMENT:

The company has managed to maintain stable margins over time, despite ongoing reimbursement pressure from governmental payers, which account for roughly 60% of DaVita's dialysis-related revenues. Continued focus on efficiency, increasing scale, and positive trends in commercial reimbursement rates have supported profitability.

Nevertheless, Medicare's bundled rate for dialysis services, instituted in 2011, has the potential to pressure margins longer term. So far, however, the bundled reimbursement system has not been a major issue for DaVita's credit profile, with good cost control and lower Epogen utilization helping in this regard. Nevertheless, it is possible that Medicare could decrease the bundled rate if EPO utilization continues to decline.

Medicare is scheduled to incorporate specialty oral drugs into the bundled rate in 2014, which could affect margins depending on utilization and the new bundled rate. In addition, should Congress not achieve its deficit reduction goals this November, a 2% automatic reduction in scheduled reimbursement rates could follow in 2013.

ADEQUATE LIQUIDITY AND MANAGEABLE DEBT MATURITIES:

At March 31, 2012, DaVita had adequate liquidity of approximately $458 million in cash and short-term securities and $297 million of availability under its $350 million (net of $53 million in letters of credit) secured bank facilities that expire in 2015. The facility's leverage covenant is currently at 4.25x. It drops to 4.00x in 2013 and 3.75x thereafter.

At March 31, 2012, DaVita had approximately $4.5 billion in outstanding debt, consisting of approximately $2.88 billion in term loans under its senior secured credit facility and $1.55 billion of senior unsecured notes. Debt maturities are as follows:

Senior secured credit facility:

--$950 million Term Loan A due in 2015;

--$200 million Term Loan A2 due in 2016;

--$1,733 million Term Loan B due in 2016.

Senior unsecured notes:

--$775 million due 2018.

Senior unsecured notes:

--$775 million due 2020.

Fitch has affirmed the following ratings:

--Issuer Default Rating (IDR) affirmed at 'BB-';

--Senior secured bank credit facility affirmed at 'BB';

--Senior unsecured notes affirmed at 'BB-'.

Additional information is available at '[ www.fitchratings.com ]'.

Applicable Criteria and Related Research:

--'Corporate Rating Methodology' (Aug. 12, 2011).

Applicable Criteria and Related Research:

Corporate Rating Methodology

[ http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=647229 ]

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