-- U.S. ambulatory surgery center operator AmSurg Corp. plans to issue
$250 million senior unsecured notes to repay borrowings from its revolving
-- 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
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.
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
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.
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
-- We expect AmSurg to have adequate covenant cushion under its senior
-- 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.
The complete recovery analysis will be published subsequently on RatingsDirect
on the Global Credit Portal.
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
Corporate Credit Rating BB-/Stable/--
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
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