U.S. Acute Care Solutions, LLC -- Moody's affirms U.S. Acute Care Solutions, LLC's B2 CFR, outlook stable

Rating Action: Moody's affirms U.S. Acute Care Solutions, LLC's B2 CFR, outlook stableGlobal Credit Research - 19 Jan 2022New York, January 19, 2022 -- Moody's Investors Service ("Moody's") affirmed U.S. Acute Care Solutions, LLC's ("USACS") B2 Corporate Family Rating, B2-PD Probability of Default Rating and the B2 rating on the company's senior secured notes due 2026 following its announcement to acquire Alteon Health ("Alteon"). The outlook is stable.USACS will fund the Alteon acquisition (valued at approximately $560 million) with a $225 million add-on to its existing senior secured notes, incremental $275 million in preferred equity from existing investors including Apollo Management L.P(private equity sponsor), $57 million internal cash and some USACS common equity. Pro forma for the Alteon acquisition, USACS expects to increase its revenue and EBITDA by $430 million and $32 million (excluding synergies) respectively for the last 12 months ended September 2021.Moody's estimates that the company's debt/EBITDA, including add-on debt and pro forma contribution from Alteon acquisition, will be approximately 4.7 times, calculated with September-end financials. If the company successfully executes this acquisition, Moody's expects leverage to reduce by up to 1x over the next 12-18 months. However, Moody's will evaluate this deleveraging in the context of increased event risk due to the additional funding of $275 million, which will be raised from preferred equity.The following ratings were affirmed:Issuer: U.S. Acute Care Solutions, LLCCorporate Family Rating at B2Probability of Default Rating at B2-PDGtd senior secured notes ($725 million, including the proposed $225 million add-on) due 2026 at B2 (to LGD4 from LGD3)Outlook action:Issuer: U.S. Acute Care Solutions, LLCOutlook remains stable.RATINGS RATIONALEThe B2 CFR reflects USACS' strong market position as an emergency department physician staffing provider, moderately high financial leverage, and material execution risk associated with an active debt-funded acquisition strategy. Further, USACS has some geographic concentration with Texas, Maryland and Ohio representing a significant portion of business volumes.The B2 CFR is supported by USACS' strong competitive position in the markets where it operates. The company has relationships with a majority of the top ten health systems in the US. In USACSs rating, Moody's incorporates the benefits of USACS' ownership model, in which the physicians own a significant stake in the company. This results in high alignment between the interests of the company and its physician-owners. However, these benefits are partially offset by the risk that the company (which is a non-public company) will need to "buy out" physicians who seek to retire or otherwise leave the organization, possibly by issuing debt.Moody's notes that a very significant portion of USACS' capital structure is provided by the $711 million (after additional fundraising for the Alteon transaction) in perpetual, redeemable preferred stock. These securities provide a strong loss-absorption cushion to creditors in the event of default. However, if the company's restricted payment capacity (as defined in the notes offering memorandum) allows, the company has an option to redeem its preferred shares between the third and fifth anniversaries from the senior notes' original issuance date -- March 1, 2021. Moreover, Apollo also has the right to request full redemption of its preferred share investment beginning March 1, 2026. If USACS is unable to redeem the preferred shares fully after March 1, 2026, its cost of using the preferred capital provided by Apollo will increase substantially, and Apollo can force the sale of the company. Consequently, Moody's recognizes the likelihood of a material change in the company's capital structure starting from March 1, 2024 -- but more likely following March 1, 2026. The company's B2 CFR incorporates this event risk. Depending on how the company's financial policy and capital structure evolves, Moody's will update its credit analysis accordingly.The rating also reflects the company's good liquidity profile. This liquidity assessment is supported by Moody's expectations of approximately $50 million in free cash flow in the next 12 months as well as cash balances of approximately $32 million when the add-on transaction closes. It also reflects Moody's expectation of full availability under the company's $75 million senior secured first lien revolver (unrated).The stable outlook reflects Moody's expectation that the company will continue its expansion while employing a balanced growth strategy and keeping leverage in 4.0-5.5 times range.Social considerations are material to the rating, given the substantial implications for public health and safety. The company was moderately impacted by the coronavirus outbreak last year and the recovery is still ongoing. As a provider of emergency medicine physician staffing, USACS faces high social risk. The No Surprise Act, which became effective in January 2022, takes the patient out of the provider/payor dispute. The extent to which each company will get impacted will depend on the percentage of out-of-network patients they treat, specific billing and collections practices, as well as arbitration process. Governance risk considerations are also material to the rating. The company has grown rapidly in recent years through an aggressive acquisition strategy. While the company has experience in integrating acquired businesses, the acquisition of Alteon will expand the company's scale to more than 1.5x and will involve material execution risks. Moreover, the company is partially funding the acquisition through incremental preferred capital, which could be replaced by either debt or common equity in the next 2-4 years. The company's financial policies are expected to remain aggressive reflecting the preferred equity investment by private equity investor Apollo Management L.P. However, since the physicians will control the vast majority of the common equity stake in the company, they also have a material influence in deciding the company's policies. Moody's does not consider the environmental component of ESG material to the overall credit profile of the issuer.FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGSThe ratings could be upgraded if USCAS successfully executes its growth strategy, evidenced by expanded scale and diversity while maintaining its current level of profitability. A demonstrated track record of positive free cash flow and sustained debt/EBITDA below 4.0 times would also support an upgrade. However, Moody's decision to upgrade the company's rating will also consider the company's plans to manage the preferred equity financing by either swapping it into debt or paying it down through cash.The ratings could be downgraded if USACS' operating performance deteriorates, if the volume of its in-network relationships shrinks materially, or if it becomes a target of adverse regulation in one or more of its key markets. In addition, if at any point Moody's anticipates that the company will prioritize payment of preferred dividends in cash at the expense of debtholders' interest or if it replaces preferred shares with debt, ratings could be downgraded. Ratings could also be lowered if debt/EBITDA is sustained above 5.5 times, or if the liquidity weakens.Headquartered in Canton, OH, U.S. Acute Care Solutions, LLC is a provider of emergency medicine, hospitalist and observation services in 20 US states. The company is approximately 98% owned by physicians and 2% by health systems and its pro forma revenues (including Alteon acquisition) are approximately $1.5 billion.The principal methodology used in these ratings was Business and Consumer Services published in November 2021 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1287897. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.REGULATORY DISCLOSURESFor further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. 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Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1288235.The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating. Kailash Chhaya, CFA Vice President - Senior Analyst Corporate Finance Group Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. 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