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Rating Action:

Moody's assigns B2 CFR to U.S. Acute Care Solutions, LLC; outlook stable

24 Feb 2021

New York, February 24, 2021 -- Moody's Investors Service ("Moody's") assigned a B2 Corporate Family Rating and B2-PD Probability of Default Rating to U.S. Acute Care Solutions, LLC ("USACS"). Moody's also assigned a B2 rating to the company's proposed senior secured notes. The outlook is stable.

Proceeds from the proposed $375 million secured notes along with additional $466 million preferred equity financing from Apollo Management L.P, the new private equity (PE) investor, will be used to pay existing debt, purchase a portion of outstanding shares and cover transaction-related expenses. As a result of this transaction, the current PE investor, Welsh, Carson, Anderson & Stowe will sell all of its stake in the company.

The following ratings were assigned:

Issuer: U.S. Acute Care Solutions, LLC

Corporate Family Rating of B2

Probability of Default Rating of B2-PD

Proposed $375 million senior secured notes due 2026 of B2 (LGD3)

Outlook action:

Issuer: U.S. Acute Care Solutions, LLC

Outlook assigned stable.

RATINGS RATIONALE

The B2 CFR reflects USACS' market position as the fourth largest emergency department physician staffing provider, high financial leverage, and material execution risk associated with an active debt-funded acquisition strategy. Further, USACS has some geographic concentration with Texas, Maryland and Ohio representing approximately 50% of business volumes. Moody's estimates that the company's proforma debt/EBITDA at the close of the refinancing transaction, including certain add-backs for transaction expenses on COVID-related one-time expenses, will approximate 5.0 times.

The B2 CFR is supported by USACS' strong competitive position in the markets where it operates. The company has relationships with approximately half of the top ten health systems in the US. In USACSs rating, Moody's incorporates the benefits of USACS' ownership model, in which the physicians own a significant stake in the company. This results in high alignment between the interests of the company and its physician-owners. However, these benefits are partially offset by the risk that the company (which is a non-public company) will need to "buy out" physicians who seek to retire or otherwise leave the organization, possibly by issuing debt.

Moody's notes that a very significant portion of USACS' capital structure is provided by the $466 million in perpetual, redeemable preferred stock. These securities provide a strong loss-absorption cushion to creditors in the event of default. However, if the company's restricted payment capacity (as defined in the notes offering memorandum) allows, the company has an option to redeem its preferred shares between the third and fifth anniversaries of the proposed refinancing transaction. Moreover, Apollo also has the right to request full redemption of its preferred share investment beginning in year 6. If USACS is unable to redeem the preferred shares fully after five years, its cost of using the preferred capital provided by Apollo will increase substantially, and Apollo can force the sale of the company. Consequently, Moody's recognizes the likelihood of a material change in the company's capital structure starting from the third -- but more likely following the fifth -- anniversary of the proposed transaction. Depending on how the company's capital structure evolves, Moody's will update its credit analysis accordingly.

The rating also reflects the company's good liquidity profile. This liquidity assessment is supported by Moody's expectations of $5-$10 million in free cash flow in the next 12 months as well as cash balances of approximately $20 million at the end of March 2021. It also reflects Moody's expectation of full availability under the company's $75 million senior secured first lien revolver (unrated).

The stable outlook reflects Moody's expectation that the company will continue its expansion while employing a balanced growth strategy and keeping leverage in 4.5 - 6.0 times range.

Moody's regards the coronavirus outbreak as a social risk under its ESG framework, given the substantial implications for public health and safety. In addition, as a provider of emergency room staffing to hospitals, USACS faces high social risk. The No Surprise Act, which was signed into law in December 2020, will take the patient out of the provider-payor dispute. The inability to bill out-of-network patients for amounts over in-network rates will impact those companies that have sizeable out-of-network revenues. The extent to which each company will be impacted will depend on the percentage of out-of-network patients they treat and their specific billing and collections practices, including how often they balance bill and how aggressively they pursue collecting these balances. Moody's expects the company's financial policies to remain aggressive reflecting the PE sponsor's (Apollo Management L.P) significant preferred equity investment. However, since the physicians will control the vast majority of the common equity stake in the company, they will also have a material influence in deciding the company's policies. Moody's does not consider the environmental component of ESG material to the overall credit profile of the issuer.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

The ratings could be upgraded if USCAS successfully executes its growth strategy, evidenced by expanded scale and diversity while maintaining its current level of profitability. A demonstrated track record of positive free cash flow and sustained debt/EBITDA below 4.5 times would also support an upgrade.

The ratings could be downgraded if USACS' operating performance deteriorates, if the volume of its in-network relationships shrinks materially, or if it becomes a target of adverse regulation in one or more of its key markets. In addition, if at any point Moody's anticipates that the company will commence paying a material portion of preferred dividends in cash or replace its preferred shares with debt, ratings could be downgraded. Ratings could also be lowered if debt/EBITDA is sustained above 6.0 times, or liquidity weakens.

Headquartered in Canton, OH, US Acute Care Solutions, LLC is a provider of emergency medicine, hospitalist and observation services in 19 US states. After the proposed financing transaction, the company will be approximately 90% owned by physicians. The company's revenues are approximately $990 million.

The principal methodology used in these ratings was Business and Consumer Service Industry published in October 2016 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1037985. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1243406.

At least one ESG consideration was material to the credit rating action(s) announced and described above.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Kailash Chhaya, CFA
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Jessica Gladstone, CFA
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

No Related Data.
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