TEXT-S&P rates AmSurg Corp 'BB-'
Overview -- U.S. ambulatory surgery center operator AmSurg Corp. plans to issue $250 million senior unsecured notes to repay borrowings from its revolving credit facility. -- We are assigning the company our 'BB-' corporate credit rating. We are also assigning the proposed notes our 'B' issue-level rating with a recovery rating of '6'. -- Our stable rating outlook reflects our expectation that AmSurg will remain acquisitive and that same-center revenue will continue to grow at a moderate pace. Rating Action On Nov. 7, 2012, Standard & Poor's Ratings Services assigned Nashville, Tenn.-based surgery center operator AmSurg Corp. its 'BB-' corporate credit rating. The outlook is stable. At the same time, we assigned the proposed $250 million senior unsecured notes our 'B' issue-level rating with a recovery rating of '6', indicating our expectation for negligible (0% to 10%) recovery for lenders in the event of a payment default. We expect the maturity to be eight to 10 years. The company also has an unrated $475 million revolving credit facility, of which $296 million is borrowed, and unrated $75 million senior secured notes. Rationale The ratings on AmSurg reflect what we consider to be the company's "significant" financial risk profile and "weak" business risk profile (as our criteria define the terms). At the time of the transaction, we expect lease-adjusted debt leverage to be about 3.3x, after repayment of the revolving credit facility. However, our base case assumes that the company will borrow from its revolver again to fund the acquisitions of 15 separate centers currently under letters of intent. In this case, debt leverage will temporarily increase to about 4.5x (not including acquired EBITDA), but we expect it to decline to 3.8x by the end of 2013; liquidity is adequate. Our base case also assumes low single-digit same-center growth based on slightly positive increases in revenue per case and some growth in surgical volumes following employment trends. While we expect the reimbursement environment to remain slightly positive and EBITDA margins of around 17.5% to remain stable, third-party reimbursement risks (as owner and operator of surgical facilities) dominate the weak business risk profile. We also assume $250 million of acquisitions in 2012 and $100 million in 2013 at a purchase multiple of 7x EBITDA. In 2011 and 2010, the company used $239 million and $54 million on acquisitions, respectively. We expect debt leverage to be 3.8x and funds from operations to debt to be about 20% at the end of 2013. AmSurg owns and operates 229 ambulatory surgery centers in 35 states with some geographic concentration in California, Arizona, Maryland, Florida, and Texas. AmSurg's weak business risk profile reflects the vulnerability of the company's portfolio of surgery centers to significant reimbursement or regulatory changes related to outpatient surgery. A typical AmSurg surgery center is 51% owned by the company and 49% owned by the physician. This is in contrast to two of its largest competitors, United Surgical and Surgical Care Affiliates, who have pursed a joint venture model that includes a hospital, with good results. Still, AmSurg has been successful in growing its business with 3% same-center growth and overall revenue growth of 16% year to date. Because the facilities in this highly fragmented industry are organized as partnerships with physicians and hospitals (in some cases), AmSurg is subject to competition to both attract and retain physicians. In addition, it could face difficulties creating and retaining strong physician relationships at its acquired assets. Reimbursement is a key credit risk. Currently, standalone patient surgery centers are reimbursed at around 56% of hospital-based surgery centers. This differential provides some downside protection because hospital-based centers get paid significantly more for the same procedure. Generally more restrictive government payors account for about 28% of the company's revenue. This is similar to its peers, with the exception of United Surgical Partners (where the contribution is less, at 18% of U.S. revenue). In the near term, we expect government reimbursement and commercial reimbursement to be modestly positive for ambulatory surgery center operators. Medicare reimbursement increased 1.6% payment for outpatient ambulatory surgery centers this year. The increase for Medicare rates is set at 0.6% for 2013. Sequestration could potentially have a 2% negative impact on Medicare reimbursement rates next year, although the cut is not in our base case. Moreover, AmSurg is highly concentrated in the area of gastroenterology, exposing it to reimbursement risk for certain procedures. Currently, the company derives about 55% of revenue from its gastroenterology surgery centers, which mostly perform colonoscopies. This could also be a source of growth as the aging population and market penetration are expected to be drivers of growth for this procedure. Still, AmSurg is vulnerable to reimbursement risk in this area. The remaining revenue is from multispecialty centers (32%) and ophthalmology (13%). Over the longer term, we expect AmSurg to further diversify as it acquires more multispecialty surgery centers. Its peers, United Surgical Partners, Surgical Care Affiliates, and Symbion are more diversified in areas of treatment specialty. Still, given the key reimbursement risks that these companies face, we consider them to also have weak business risk profiles. The significant financial risk profile reflects pro forma debt leverage of 3.3x at the time of the transaction and expected leverage at 3.8x at the end of 2013, assuming debt-financed acquisitions. For purposes of calculating leverage, we consider EBITDA after distributions to minority interests. To adjust for leases, we are capturing 51% of the reported lease obligation, given that AmSurg generally does not guarantee the minority owner (physicians) portion of the operating lease. Liquidity AmSurg's liquidity is adequate. Cash sources include a cash balance of $36 million as of Sept. 30, 2012, and expected revolver availability of $422 million before accounting for the expected acquisitions. We also expect operating cash flow after distributions to minority interests and minimal working capital investment to be about $115 million annually. Maintenance capital expenditures are expected to be about $25 million a year. Our assessment of AmSurg's liquidity profile incorporates the following expectations and assumptions: -- We expect coverage of uses to be about 1.4 this year, considering pending acquisitions. -- We expect AmSurg to have adequate covenant cushion under its senior credit facility. -- We expect net sources to be positive even if EBITDA declines 30%. -- An unlikely ability to absorb low-probability shocks, without the need for refinancing based on its current cash balance and expected cash flow. -- A generally satisfactory standing in credit markets. Recovery analysis The complete recovery analysis will be published subsequently on RatingsDirect on the Global Credit Portal. Outlook Our stable rating outlook reflects our expectation that AmSurg's operating trends will materialize largely as we expect in our base case, supporting the company's acquisitive growth strategy while maintaining credit metrics consistent with a "significant" financial risk profile. We could lower the rating if the company pursues a more aggressive than expected debt-financed acquisition strategy or if reimbursement levels moderately decline and cause margins to decline by about 200 basis points, such that leverage was expected to remain significantly above 4x. An upgrade is unlikely in the near term because we do not expect that the business risk profile would change and acquisitions financed with free cash flow and some debt will likely keep debt leverage above 3x. Related Criteria And Research -- Business Risk/Financial Risk Matrix Expanded, Sept. 18, 2012 -- Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011 -- Criteria Guidelines For Recovery Ratings, Aug. 10, 2009 -- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008 Ratings List AmSurg Corp. Corporate Credit Rating BB-/Stable/-- New Rating Senior Unsecured US$250 mil nts due 2020 B Recovery Rating 6 Complete ratings information is available to subscribers of RatingsDirect on the Global Credit Portal at www.globalcreditportal.com. All ratings affected by this rating action can be found on Standard & Poor's public Web site at www.standardandpoors.com. Use the Ratings search box located in the left column.
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