Overview -- U.S. behavioral health care provider Acadia Healthcare increased the size of its unrated senior secured credit facility by $70 million to support its $91 million acquisition of Haven Behavioral Healthcare. -- We are affirming our 'B' corporate credit rating on the company and our 'B-' issue-level rating. -- The stable rating outlook reflects our expectation that double-digit revenue growth over the near term will be supported by organic expansion and management's acquisitive strategy. Rating Action On March 29, 2011, Standard & Poor's Ratings Services affirmed its 'B' corporate credit rating on Franklin, Tenn.-based Acadia Healthcare Co. Inc. The rating outlook is stable. At the same time, we affirmed our 'B-' issue-level rating on its existing unsecured notes (one notch below the corporate credit rating). The '5' recovery rating remains unchanged and indicates our expectation of modest (10%-30%) recovery of principal in the event of payment default. The company increased its term loan to $155 million from $130 million and its revolver size to $75 million from $30 million. The company also has $155 million on its outstanding term loan and a $75 million revolver, which we do not rate. Rationale The rating on Acadia reflects its aggressive growth strategy and "highly leveraged" financial risk profile. We characterize Acadia's business risk profile as "weak" because of the challenges it faces in controlling its rapid expansion from a small base and its exposure to uncertain third-party reimbursement. From a financial perspective, growth funding is likely to keep leverage at or just above 5x over the next year, even with the double-digit revenue and EBITDA growth we expect and amortization payments mandated under its credit facility. When new managers joined the company early in 2011, Acadia acquired Youth and Family Centered Services (YFCS) in a debt-financed transaction, more than doubling the company's revenue and earnings base, raising Acadia's facility count to 19. Acadia was further expanded in a debt-financed acquisition of PHC in late 2011 (a network of 34 acute behavioral facilities and residential treatment centers across 18 states). The March 2012 acquisition of Haven Behavioral Healthcare will add another three facilities to its portfolio of inpatient behavioral hospitals (a total of 166 acute inpatient psychiatric beds) contributing about $43 million in annual revenues. As a result of Acadia's rapid increase in business, we expect double-digit revenue growth in 2012. We believe 2012 growth will be further supported by the company's strategy of increasing bed count and converting some residential treatment beds to higher level of service acute hospital beds. Still, the challenges of further growing and controlling such rapid expansion are formidable and are reflected in our view of the company's business risk. Management's extensive experience in the behavioral health field (including its prior involvement in Psych Solutions, acquired by Universal Health Services Inc.), will aid the attempt to improve operational management at its portfolio of facilities. We expect margins to improve by over 100 basis points (bps) in 2012, and contribute to increasing free operating cash flow. Acadia's weak business risk profile further reflects significant reimbursement risk with roughly 69% of its revenue derived from Medicaid funding. This is a particular concern because state-sponsored programs are facing budgetary pressure exacerbated by 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--subject the company to reimbursement pressures. After the PHC financing in November 2011 (which included a large dividend), lease-adjusted debt approached 6x, with expectation to decline below 5x as a result of mandatory debt repayment and rapid growth. However, the add-on of $25 million to its term loan and increased borrowing on its expanded revolver results in revised expectations that leverage will remain at or just above 5x in 2012. Despite Acadia's late 2011 equity offering (which we expect to provide some support to its growth initiatives), management's ambitious strategy could limit meaningful reduction in debt leverage over the near term. 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, including the expanded $70 million revolving credit facility. We expect pro forma cash flow from operations in 2012 above $25 million sufficient to cover capital expenditure requirements, mandatory debt payments ($8 million in 2012), and modest tuck-in acquisitions. -- We also expect adequate cushion over 15% on its covenants that step down to 5.75x in the first quarter of 2012. -- We expect that, in the event of a 15% decline in EBITDA, sources of liquidity will exceed uses. However, Acadia would likely curtail any expansionary spending. -- We also expect that it would be difficult to fund low-probability, high-impact additional debt borrowings. While it is unlikely, there could be unexpected litigation costs tied to the delivery of services to a 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 stable, reflecting our expectation that management will be able to control a fast-growing organization without deteriorating margins. Given the added debt burden, we expect Acadia's financial risk profile to remain highly leveraged, precluding consideration for a higher rating in the near term. However, an upgrade could be possible if the company can improve credit metrics, with sustainable adjusted debt to EBITDA below 5x and funds from operations to debt above 15%. This could occur if Acadia meaningfully follows through with its expansion and operating strategy, supporting double-digit revenue growth and EBITDA margin improvement, while also making voluntary debt payments. A downgrade could occur if Acadia's operations are stifled by significant reimbursement cuts or inability to successfully integrate its operations. If EBITDA declined by more than 10%, tight covenant cushions below 10% in 2012 could be a particular concern if we thought that it might be an ongoing issue. Ratings List Ratings Affirmed Acadia Healthcare Co. Inc. Corporate Credit Rating B/Stable/-- Senior Unsecured B- Recovery Rating 5 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.