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Rating Action:

Moody's changes Team Health's outlook to negative; affirms B3 CFR

09 Aug 2019

New York, August 09, 2019 -- Moody's Investors Service ("Moody's") today affirmed the B3 Corporate Family Rating (CFR) and B3-PD Probability of Default Rating of Team Health Holdings, Inc. ("Team Health"). Moody's also affirmed the B2 rating on the company's senior secured credit facilities and Caa2 rating on its unsecured notes. At the same time, the outlook was changed to negative from stable.

The change of outlook reflects rising uncertainty around Team Health's ability to reduce leverage given its recently disclosed dispute with UnitedHealth Group Incorporated ("UnitedHealth") (A3 long-term issuer rating), one of its largest commercial payors. UnitedHealth notified Team Health in July 2019 that it will terminate approximately two-thirds of its in-network contracts with Team Health between October 15, 2019 until July 1, 2020. The company also said that UnitedHealth had significantly reduced its payments to Team Health for out-of-network services.

Moody's believes that the two companies will eventually agree on modified contract terms. However, Moody's believes that modified contracts are likely to come with lower reimbursement rates for Team Health, which will reduce profitability. Further, a drawn-out negotiation process may lead to disruption to hospital customers and contract losses. While there is a range of potential outcomes for Team Health, the company's very high leverage raises the risk that even a modest reduction in profitability will significantly raise debt/EBITDA. Moody's estimates that TeamHealth's pro forma debt to EBITDA was approximately 8.2 times at the end of June 30, 2019.

The affirmation of the B3 is supported by the Team Health's demonstrated ability to generate consistently positive free cash flow of more than $100 million annually. Further Team Health's liquidity remains good. The company has a sizable cash balance ($299.4 million as of 6/30/2019), near full availability of its $400 million revolver and no near-term debt maturities. The company has also shown early signs of progress in executing its business turnaround. This affords the company some flexibility to absorb a modest negative development with respect to contract negotiations with UnitedHealth.

That said, reduced rates with UnitedHealth (or other insurers) that result in a meaningful decline in free cash flow will likely lead to a rating downgrade. Reduced free cash flow would not only limit the company's ability to repay debt, but also its ability to execute its tuck-in acquisition strategy.

Affirmations:

..Issuer: Team Health Holdings, Inc.

.... Corporate Family Rating, Affirmed B3

.... Probability of Default Rating, Affirmed B3-PD

....Senior Secured Revolving Credit Facility expiring 2022, Affirmed B2 (LGD3)

....Senior Secured Term Loan due 2024, Affirmed B2 (LGD3)

....Senior Unsecured Notes due 2025, Affirmed Caa2 (LGD6)

Outlook Actions:

..Issuer: Team Health Holdings, Inc.

....Outlook, Changed To Negative From Stable

RATINGS RATIONALE

Team Health's B3 CFR reflects its very high leverage and challenging operating environment. This includes weak emergency department volume trends, reimbursement risk, and the company's exposure to uninsured individuals, each of which is a risk to profitability. The credit profile is supported by Team Health's large scale and strong competitive position in the highly fragmented physician staffing industry. The credit profile is also supported by good liquidity and stable cash flow. Moody's also expects Team Health to gradually improve its post-acute care business.

The negative outlook reflects the increasing risk that Team Health will be unable to reduce its leverage below 8.0 times by the end of 2020 due to either (1) failure to reach an agreement with United Healthcare on in-network contracts; or (2) if the renegotiated contracts are materially unfavorable to Team Health compared to existing contracts today.

The ratings could be downgraded if Moody's anticipates a significant reduction in free cash flow or if liquidity weakens. At any point, if Moody's expects that the company will be unable to reduce its adjusted debt/EBITDA to below 8.0 times by 2020, the ratings could be downgraded. The ratings could also be downgraded if the company experiences contract losses, operating performance weakens, or if unfavorable regulatory changes significantly impact the company.

The ratings could be upgraded if Team Health returns to organic revenue growth, improves its profit margins and further reduces its business concentration in the emergency department. Finally, the company would need to reduce debt/EBITDA to below 6.5 times before Moody's would consider a higher rating.

The principal methodology used in these ratings was Business and Consumer Service Industry published in October 2016. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

Team Health is a provider of physician staffing and administrative services to hospitals and other healthcare providers in the U.S. The company is affiliated with more than 16,000 healthcare professionals who provide emergency medicine, hospital medicine, anesthesia, urgent care, pediatric staffing and management services. The company also provides a full range of healthcare management services to military treatment facilities. Net revenues are approximately $4.7 billion.

REGULATORY DISCLOSURES

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.

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

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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