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Rating Action:

Moody's changes U.S. Anesthesia Partners' outlook to negative; affirms B2 CFR

28 Feb 2020

New York, February 28, 2020 -- Moody's Investors Service ("Moody's") today affirmed the B2 Corporate Family Rating (CFR) and B2-PD Probability of Default Rating of U.S. Anesthesia Partners, Inc. ("USAP"). Moody's also affirmed the B1 rating on the company's senior secured first lien credit facilities and Caa1 rating on its secured second lien term loan. At the same time, the outlook was changed to negative from stable.

The change of outlook to negative reflects Moody's expectation that the company's earnings could face erosion because of UnitedHealth Group Incorporated's ("UnitedHealth") (A3 long-term issuer rating) decision to cancel its in-network contracts with USAP in Texas. UnitedHealth recently notified USAP that it will terminate its Texas in-network contracts in April 2020. These contracts represent approximately 10% of USAP's annual consolidated revenues.

The rating affirmation reflects, in part, the company's good liquidity supported by a sizeable cash balance ($144 million) and full revolver availability ($200 million) at the end of fiscal 2019. The strong liquidity will temporarily help the company in managing the negative impact of the contract terminations. The affirmation also reflects Moody's view that some of the earnings loss can be mitigated by lower variable compensation to its physicians, many of which are partial owners of USAP.

Moody's believes that the two companies will eventually agree on modified contract terms. However, the modified contracts could come with lower reimbursement rates for USAP, which will reduce profitability. Further, a drawn-out negotiation process may lead to disruption to hospital customers and contract losses.

Ratings Affirmed:

Issuer: U.S. Anesthesia Partners, Inc.

... Corporate Family Rating at B2

... Probability of Default Rating at B2-PD

... $200 million Senior Secured First Lien Revolving Credit Facility expiring in 2022 at B1 (LGD3)

... $1,615 million Senior Secured First Lien Term Loan due 2024 at B1 (LGD3)

... $300 million Senior Secured Second Lien Term Loan due 2025 at Caa1 (LGD6)

Outlook Actions:

... Outlook changed to negative from stable

RATINGS RATIONALE

USAP's B2 CFR reflects Moody's expectations that the company's financial leverage will remain high. Adjusted debt/EBITDA approximated 6.2 times for the twelve months ended December 31, 2019. The ratings also reflect USAP's geographic concentration, as it operates in nine states, with the majority of revenue derived from Texas. Moody's expects that the company will utilize free cash primarily to fund acquisitions or pay discretionary distributions to its owners. The rating incorporates the benefits of USAP's ownership model, in which the physicians who provide the company's services own a majority stake in the company. This results in high alignment between the company and its physician-owners. There is also a high degree of variability in USAP's physician compensation, which helps mitigate the impact on earnings of rate or volume pressures. 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. The rating also reflects the company's good liquidity profile.

As a provider of physician staffing services, USAP faces significant social risk. Several legislative proposals have been introduced in the US Congress that aim to eliminate or reduce the impact of surprise medical bills. Surprise medical bills are received by insured patients who receive care from providers outside of their insurance networks, usually in emergency situations. Moody's believes that physician staffing companies like USAP would be adversely affected if these proposals are enacted and if they use some form of median reimbursement rate as a benchmark.

The negative outlook reflects the increasing risk that USAP will operate at a higher leverage than in the past due to either (1) failure to reach an agreement with UnitedHealth on in-network contracts; or (2) if the renegotiated contracts are unfavorable to USAP compared to existing contracts today. Moody's expects leverage will likely creep higher over the next 12-18 months as the company absorbs lower rates from UnitedHealth. That said there is significant uncertainty around the degree of the rate reduction as well as the degree to which USAP can mitigate the impact through lower variable physician compensation.

Ratings could be downgraded if the company's operating performance weakens for reasons including loss of profitable contracts, or if unfavorable regulatory changes significantly impact the company. Ratings could also be downgraded if the company's financial policies become more aggressive or debt/EBITDA is sustained above 6.5 times. Ratings could also be downgraded if the company's liquidity profile weakens.

Ratings could be upgraded if the company executes its growth strategy, resulting in greater scale and geographic diversification. Ratings could also be upgraded if the company's financial policies become more conservative, such that debt/EBITDA approaches 5 times.

U.S. Anesthesia Partners provides anesthesia services through around 4,900 anesthesia providers in roughly 1,065 facilities in 11 major geographies across 9 US states. Net revenues were approximately $1.9 billion in fiscal 2019. The company is 46% owned by approximately 1,300 physician partners and management. The remaining share of the company is owned by Welsh Carson Anderson & Stowe (22%), Berkshire Partners (20%), GIC, LP (11%), and Heritage Group (1%).

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.

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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