New York, April 07, 2020 -- Moody's Investors Service, ("Moody's") changed
Confluent Health, LLC's ("Confluent") outlook
to negative from stable and affirmed its B3 Corporate Family Rating (CFR),
B3-PD Probability of Default Rating, B3 Senior secured first
lien revolving credit facility rating, and B3 senior secured first
lien term loan rating.
The change of outlook reflects the combined credit effects of the rapid
and widening spread of the coronavirus outbreak, deteriorating global
economic outlook, falling oil prices, and asset price declines.
These developments are having unprecedented effects and are creating a
severe and extensive credit shock across many sectors, regions and
markets. Physical therapy has been designated as an essential healthcare
service by the Centers for Disease Control and Prevention (CDC).
However, Moody's believes that physical therapy companies
like Confluent will experience a significant drop in volumes over the
coming weeks due to declines in demand and appointments.
The affirmation of the B3 CFR reflects Moody's view that Confluent
can reduce variable costs and growth capital expenditures to maintain
adequate liquidity through the public health emergency. Moody's
expects that there will be significant erosion of operating performance
in the second quarter, and perhaps beyond, depending on the
duration of the coronavirus crisis. That said, Moody's
believes that Confluent will continue to be able to serve a portion of
patients through telehealth visits and that demand for physical therapy
services will return to more normalized levels in the second half of 2020.
Moody's took the following rating actions:
Issuer: Confluent Health, LLC
Corporate Family Rating, affirmed at B3
Probability of Default Rating, affirmed at B3-PD
Gtd Senior secured first lien revolving credit facility expiring 2024,
affirmed at B3 (LGD3)
Gtd Senior secured first lien term loan due 2026, affirmed at B3
(LGD3)
Outlook Actions:
Issuer: Confluent Health, LLC
Outlook, Changed To Negative From Stable
RATINGS RATIONALE
Confluent's B3 Corporate Family Rating reflects its small scale
relative to other rated physical therapy peers, geographic concentration
in three states that contribute over half of the company's revenues
and high financial leverage. The rating also reflects the relatively
low barriers to entry in the physical therapy business and the risk of
market oversaturation given the rapid expansion of Confluent and many
of its competitors. The rating also reflects the risks associated
with the company's rapid expansion strategy as it grows, both
organically and through acquisitions. The rating is supported by
Confluent's track record of good profit margins, low working
capital requirements, and low capital expenditure needs.
Additionally, Confluent has some ability to conserve liquidity by
reducing new clinic openings. Moody's expects that the demand for
physical therapy will continue to grow given it is relatively low-cost
and can prevent the need for more expensive treatments.
Moody's considers Confluent to have adequate liquidity. The
company has historically had positive free cash flow, though limited
by growth and acquisition spending. While the company can reduce
these expenditures, Moody's expects revenue and earnings to
decline significantly in the coming weeks, resulting in negative
free cash flow. Liquidity is supported by the company's approximately
$15 million of cash as of September 30, 2019, as well
as another $50 million of cash from the company's recent
revolver draw.
Moody's considers coronavirus to be a social risk given the risk
to human health and safety. Aside from coronavirus, Confluent
faces other social risks such as the rising concerns around the access
and affordability of healthcare services. However, Moody's
does not consider the physical therapy providers to face the same level
of social risk as many other healthcare providers. Further,
Confluent benefits from positive social considerations, as physical
therapy can be a less expensive and a safer alternative to surgery or
opioid usage. From a governance perspective, Moody's
views Confluent's growth strategy to be aggressive given its history
of debt-funded new clinic openings and clinic acquisitions.
Given the company's private equity ownership, Moody's
considers the risk of a debt-funded transaction to be a possibility,
though unlikely in the short-term.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
Ratings could be downgraded if the company's liquidity weakens or if the
company is not able to reduce variable costs and capital expenditures
in the coming weeks to mitigate the negative impact of coronavirus on
volumes. Beyond coronavirus, if the company fails to effectively
manage its rapid growth or the company pursues more aggressive financial
policies, the ratings could be downgraded.
Although not likely in the near-term, an upgrade is possible
if Confluent materially increases its size and scale and demonstrates
stable organic growth at the same time it effectively executes on its
expansion strategy. Additionally, adjusted debt/EBITDA sustained
below 5.0 times could support an upgrade.
Confluent Health, LLC, headquartered in Louisville,
Kentucky, is a provider of physical rehabilitation services which
includes outpatient physical therapy, workplace injury prevention
programming, and advanced education courses and degrees for physical
therapists. The company is approximately 74% owned by Partners
Group, a Zurich-based private equity firm with a regional
base in Denver, CO. The company's pro forma revenues (including
contributions from recent acquisitions) are approximately $200
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.
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At least one ESG consideration was material to the credit rating outcome
announced and described above.
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issued by one of Moody's affiliates outside the EU and is endorsed
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Jaime Johnson
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.
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