11 Min Read
Overview -- U.S. behavioral health care provider Acadia Healthcare Co. Inc. plans to acquire two behavioral health care companies with a total purchase price of about $260 million. -- We expect the transaction to be financed with close to $200 million of equity, following their proposed offering, with the remainder financed with new debt. -- We are affirming our 'B' corporate credit rating as a result of the planned acquisition. We are placing the 'B-' issue-level rating on the company's unsecured notes on CreditWatch with negative implications. -- Our positive outlook on the corporate credit rating still reflects our expectation that management will continue to execute its ambitious growth strategy while maintaining leverage below 5x and improving margins. Rating Action On Dec. 5, 2012, Standard & Poor's Ratings Services affirmed its corporate credit rating on Franklin, Tenn.-based Acadia Healthcare Co. Inc. The outlook on the corporate credit rating remains positive. At the same time, we affirmed our 'B-' issue-level on the company's unsecured notes and placed the issue-level rating on CreditWatch with negative implications. The '5' recovery rating on this debt indicates our expectation for modest (10%-30%) recovery of principal in the event of payment default. The company currently has about $149 million of outstanding term debt, a $75 million revolver, and $23 million of industrial revenue bonds, which we do not rate. Rationale The ratings on Acadia reflects its "weak" business risk and "aggressive" financial risk profiles. The weak business risk profile incorporates the operating and integration challenges Acadia faces due to its rapidly expanding business and its exposure to uncertain third-party reimbursement. The aggressive financial risk profile reflects our expectation that acquisition-related debt will likely keep leverage between 4x and 5x over the next year. Acadia acquires and develops in-patient behavioral health care facilities that include acute in-patient psychiatric facilities, residential treatment care, and other behavioral health care operations. We expect Acadia to remain extremely acquisitive. Under new management, it acquired Youth and Family Centered Services (YFCS) in a debt-financed transaction in early 2011. The acquisition more than doubled the company's revenue and earnings base, and raised its facility bed count to 1,608 beds from 426. Acadia made an additional debt-financed acquisition of Pioneer Behavioral Health (PHC; a network of 10 facilities across 10 states) in late 2011, which brought Acadia's bed count to almost 2,000. Pro forma the acquisitions of Behavioral Centers of America (BCA) and AmiCare Behavioral Centers (AmiCare) that are expected to close in the fourth quarter of 2012; the recent acquisition of Park Royal Hospital (total add-on of 684 beds); and two acquisitions in the first eight months of 2012 that include Haven Behavioral Healthcare (add-on of 166 beds) and Timberline Knolls (add-on of 122 beds), we expect total bed count to increase to 3,100. We expect 2012 acquisitions will contribute about $197 million in annual revenues and EBITDA of close to $50 million, excluding any margin and bed expansion opportunities. As a result of Acadia's acquisitions, our 2012 base-case scenario incorporates revenue growth between 100% and 110%. As of the third quarter, the company was on track to meet our expectations, with year-to-date growth of 108%. Our growth assumptions factor in organic growth of 5% as a result of a 300-bed expansion at existing facilities and the conversion of some residential treatment beds to higher revenue- and margin-generating acute hospital beds. We project that the company will expand its bed count by 150 in 2013 at existing facilities, excluding fourth-quarter acquired facilities, and continue to remain acquisitive, resulting in close to 60% revenue growth in 2013. We expect adjusted margins for 2012 to be around 21%, consistent with third-quarter 2012, and improve to around 22% in 2013, aided by the expansion of beds served at existing and recently acquired facilities. The company has successfully expanded margins at its 2011 acquired facilities by about 230 basis points (bps) for the nine months ended Sept. 30, 2012. Our 2013 assumptions also incorporate our expectation that the company will continue to acquire higher margin acute in-patient psychiatric facilities that will contribute about $120 million in revenues. Management's extensive experience and solid track record in the behavioral health field (including its prior involvement in Psychiatric Solutions Inc., which was acquired by Universal Health Services Inc.) support our expectations for margin expansion through increased revenue per bed. We expect EBITDA growth to lead to improvements in FOCF, which we project to be around $10 million and above $25 million in 2012 and 2013, respectively. As of Sept. 30, 2012, Acadia Healthcare was on track to exceed our expectations for FOCF, generating $9 million for the nine months ended Sept. 30, 2012. Acadia's weak business risk profile reflects significant reimbursement risk. Pro forma for 2012 acquisitions, roughly 57% of its revenue will derive from Medicaid. The company did not encounter any rate cuts from any state for 2013. However, the risk for possible future rate cuts remains, given the budgetary pressures state-sponsored programs are facing due to current macroeconomic trends. Since Acadia's Medicaid revenues are related to child and adolescent behavioral health services, there may be political reluctance to cut such spending. Moreover, the company's geographic diversification may blunt the threat of rate cuts from one state. Still, this exposure--and even reimbursement tied to Medicare, commercial payors, and private payors--subjects the company to potential reimbursement pressures. The company's business risk profile also reflects ongoing challenges of an aggressive growth strategy, such as the potential underperformance of an acquired facility or integration shortfalls and business disruptions. The aggressive financial risk profile incorporates our expectation that leverage will range between 4x and 5x. We expect acquisition opportunities will be funded primarily through debt. If an acquisition pushes debt leverage beyond 5x, we expect the company to use subsequent equity offering proceeds (market permitting) to quickly pay down debt to keep leverage within the 4x-5x range. Acadia had two equity offerings in the past 12 months that have raised a combined $200 million that were used primarily to fund acquisitions, and we expect close to another $200 million equity raise to fund the AmniCare and BCA acquisitions. Liquidity Acadia has "adequate" sources of liquidity to cover operating needs over the next year. Relevant aspects of its liquidity profile include: -- We expect sources of liquidity over the next 12 months to cover uses by at least 1.2x. -- Sources include a $75 million revolving credit facility, expected cash reserves of $24 million pro forma the transaction, and our expectation of pro forma FOCF around $10 million. -- Uses include expected capital expenditures of around $40 million, which includes spending for the expansion of existing facilities and mandatory debt payments ($8 million in 2012). -- We also expect adequate cushion of over 25% on new debt covenants. -- We expect that, in the event of a 15% decline in EBITDA, sources of liquidity will exceed uses. However, Acadia would likely curtail expansionary spending. -- Acadia would unlikely be able to absorb low-probability, high-impact events, with limited needs for refinancing. While unlikely, there could be unexpected litigation costs tied to the delivery of services to a potentially difficult patient population. -- There are no near-term maturities until 2016, when Acadia's credit facility expires. Recovery analysis For the complete recovery analysis, please see the recovery report on Acadia, to be published shortly after this release on RatingsDirect. Outlook Our rating outlook on Acadia is positive, reflecting our expectation that management will be able to control a fast-growing organization while improving margins. Given the company's ambitious growth strategy, we expect Acadia's financial risk profile to remain aggressive. An upgrade could be possible if we expect the company can generate FOCF of $25 million or more in 2013, maintain or improve margins, and operate with leverage below 5x, and we believe these metrics will be maintained. We could revise the outlook back to stable if Acadia makes a major debt-financed acquisition that causes debt leverage to peak above 5.5x, with the likelihood that it will be sustained above 5.0x, supporting a "highly leveraged" financial risk profile. We could also revise the outlook to stable if operations are stifled by significant reimbursement cuts, or the failed integration of recently acquired operations results in an EBITDA decline of more than 400 bps. This would result in credit metrics supportive of a highly leveraged financial risk profile. This would also stifle our expectation of generating FOCF of around $25 million in 2013. Related Criteria And Research -- Business Risk/Financial Risk Matrix Expanded, Sept. 18, 2012 -- Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011 -- Use Of CreditWatch And Outlooks, Sept. 14, 2009 -- Criteria Guidelines For Recovery Ratings, Aug. 10, 2009 -- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008 -- 2008 Corporate Criteria: Rating Each Issue, April 15, 2008 -- 2008 Corporate Criteria: Ratios And Adjustments, April 15, 2008 Ratings List Ratings Affirmed Acadia Healthcare Co. Inc. Corporate Credit Rating B/Positive/-- Ratings Affirmed; CreditWatch Placement To From Acadia Healthcare Co. Inc. Senior Unsecured B-/Watch Neg B- Recovery Rating* 5 5 *Standard & Poor's does not place its recovery ratings on CreditWatch; however, this does not preclude our recovery assessment from potentially changing in the future. 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.