March 29, 2012 / 6:10 PM / 7 years ago

TEXT-S&P affirms Acadia Healthcare ratings

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 	
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