New York, April 28, 2022 -- Moody's Investors Service ("Moody's") downgraded the ratings of Aveanna Healthcare LLC ("Aveanna"), including the Corporate Family Rating (CFR) to B3 from B2 and the Probability of Default Rating (PDR) to B3-PD from B2-PD. Moody's also downgraded the rating of Aveanna's senior secured second lien term loan to Caa2 from Caa1. Concurrently, Moody's affirmed the ratings of Aveanna's senior secured first lien revolving credit facility, term loan and delayed draw term loan at B2. There is no change to the Speculative Grade Liquidity Rating at SGL-2, signifying good liquidity. The outlook remains stable.
The downgrade of Aveanna's ratings reflects Moody's expectation for prolonged high financial leverage resulting from weaker-than-expected earnings. Based on the mid-point of Aveanna's fiscal year 2022 guidance, Moody's forecasts debt to EBITDA in the high 7 times range. Further, Moody's expects that leverage will decline to the high 6 times range in fiscal year 2023. The weaker-than-expected EBITDA is predominantly driven by persistent nursing labor shortages and increased wage pressures.
Downgrades:
..Issuer: Aveanna Healthcare LLC
.... Corporate Family Rating, Downgraded to B3 from B2
.... Probability of Default Rating, Downgraded to B3-PD from B2-PD
....Senior Secured Second Lien Term Loan, Downgraded to Caa2 (LGD5) from Caa1 (LGD6)
Affirmations:
..Issuer: Aveanna Healthcare LLC
....Senior Secured First Lien Term Loan, Affirmed B2 (LGD3)
....Senior Secured First Lien Delayed Draw Term Loan, Affirmed B2 (LGD3)
....Senior Secured First Lien Revolving Credit Facility, Affirmed B2 (LGD3)
Outlook Actions:
..Issuer: Aveanna Healthcare LLC
....Outlook, Remains Stable
RATINGS RATIONALE
Aveanna's B3 CFR reflects its high pro forma financial leverage of 6.4 times (with Moody's standard adjustments) for the fiscal year ended January 1, 2022. This calculation gives the benefit of adding back unusual COVID-19 related costs. Moody's forecasts that leverage will increase to the high 7 times in fiscal year 2022, declining to the high 6 times in fiscal year 2023. Moody's anticipates persistent nursing labor shortages resulting in upward wage inflation that will pressure Aveanna's earnings. Moody's believes that the company will continue to pursue an aggressive acquisition growth strategy, including acquisitions that are likely to be funded with incremental debt, as evidenced by the presence of a $200 million delayed draw term loan in the capital structure. The rating also reflects Aveanna's highly concentrated payor mix with significant Medicaid exposure, and meaningful geographic concentration in the states of California, Texas, and Pennsylvania.
The rating benefits from Aveanna's leading niche position in the otherwise fragmented market of pediatric home health services, where it provides critical services to children and families, as well as its expanding presence in the home health and hospice segment. Moody's believes that the company's strategy to grow its home health and hospice businesses will benefit the credit profile through greater scale, increased service line, payor diversity and faster growth.
Social and governance considerations are material to Aveanna's credit profile. Aveanna will remain exposed to the social risks of providing health care and related services in private duty nursing and therapy to a highly vulnerable patient base often comprised of sick and disabled children who need near around-the-clock care. There is ongoing legislative, political, media and regulatory focus on ensuring the delivery of medically appropriate care to this patient base. Private duty nursing, home health and hospice companies that bill Medicare and Medicaid are subject to a significant number of complex regulations. Any weakness in providing healthcare services - real or perceived - can negatively affect Aveanna's reputation and ability to attract and sustain clients at profitable rates. Additionally, a possible data breach event, where intellectual property and other internal types of sensitive records are released could cause legal or reputational harm.
With respect to governance, Aveanna's private equity investors' significant ownership interest will result in meaningful governance risk. Moody's anticipates the strategy to supplement organic growth with material debt-funded acquisitions will persist, given the very fragmented nature of the market.
The stable outlook reflects Moody's expectation that Aveanna will continue to grow on the top-line, but that earnings will remain pressured and financial leverage will remain high, as nursing labor shortages persist and the company will remain acquisitive, over the next 12-18 months. The outlook also reflects Moody's expectations that Aveanna will maintain good liquidity.
The Speculative Grade Liquidity Rating of SGL-2 reflects Moody's expectation that Aveanna will maintain good liquidity, highlighted by modest cash balances and full availability under both its $200 million revolving credit facility and $200 million delayed draw term loan. The company's liquidity is supported by approximately $30 million of cash as of January 1, 2022. Moody's expects Aveanna will generate breakeven free cash flow over the next 12 months. However, excluding repayment of deferred payroll taxes of approximately $26 million and Medicare advanced payments of $4 million to the government, free cash flow is expected to be positive.
Aveanna's senior secured first lien credit facility, comprised of a $200 million revolving credit facility expiring 2026, $860 million term loan due 2028, and $200 million delayed draw term loan due 2028, is rated B2, one notch above the B3 Corporate Family Rating. This reflects the benefit of a layer of loss absorption provided by the $415 million second lien term loan due 2029, which is rated Caa2.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
The ratings could be upgraded if Aveanna successfully grow its home health and hospice business, thereby further diversifying its geographic and payor mix. Quantitatively, debt/EBITDA sustained below 6.0x could support an upgrade. The company would also need to maintain or improve upon its good liquidity.
The ratings could be downgraded if Aveanna experiences significant reimbursement reductions and/or further wage pressures. Ratings could be downgraded if Aveanna pursues more aggressive financial policies including significant debt-funded acquisitions. Further, weakening of liquidity or sustained negative free cash flow could lead to a downgrade.
The principal methodology used in these ratings was Business and Consumer Services published in November 2021 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1287897. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.
Headquartered in Atlanta, Georgia, Aveanna Healthcare LLC, is a leading provider of pediatric skilled nursing and therapy services, home health and hospice services, as well as medical solutions, such as enteral nutrition, respiratory therapy, and medical supply procurement. Aveanna completed an initial public offering in April 2021, however, as of December 31, 2021, private equity investors Bain Capital and J. H. Whitney, retain a significant ownership interest in the company. Aveanna generated revenues of approximately $1.7 billion for the fiscal year ended January 1, 2022. However, pro forma for the two recent acquisitions of Comfort Care and Accredited, revenues are approximately $1.9 billion.
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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David Locker
Analyst
Corporate Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
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Ola Hannoun-Costa
Associate Managing Director
Corporate Finance Group
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Client Service: 1 212 553 1653
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Moody's Investors Service, Inc.
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