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Rating Action:

Moody's downgrades Envision Healthcare's CFR to Caa2; outlook changed to negative

06 Apr 2020

New York, April 06, 2020 -- Moody's Investors Service ("Moody's") today downgraded the ratings on Envision Healthcare Corporation ("Envision"), including the corporate family rating ("CFR") to Caa2 from B3 and probability of default rating to Caa2-PD from B3-PD. The rating agency also downgraded Envision's instrument ratings, including the ABL facility rating to B1 from Ba2, the ratings on the senior secured revolving credit facility and term loan to Caa1 from B2, and the rating on the unsecured notes to Ca from Caa2. The outlook, previously stable, was changed to negative.

The downgrade of the CFR to Caa2 reflects significant volume declines across Envision's physician staffing subspecialties and ambulatory surgery centers (ASCs) that will weaken earnings and liquidity. "Volume declines in anesthesiology and ASCs relate principally to the cancellation/postponement of non-essential elective surgical procedures across the US as government officials implore hospitals to prepare for a surge in patients infected by the coronavirus," stated Moody's Vice President/Senior Credit Officer Jonathan Kanarek. "Volume declines in emergency medicine have been driven by shelter at home directives given by roughly two-thirds of US state governors, effectively comprising the vast majority of the population, and to a lesser extent, a tendency to avoid emergency rooms if possible," Kanarek continued. The downgrade also reflects Moody's expectation that the ongoing spread of the coronavirus will make it increasingly challenging for Envision to manage its labor costs, sustain consistent revenue cycle management, and maintain subsidies that it receives from hospitals. Moody's expects that these numerous pressures will be partly offset by various cost containment initiatives and financial relief provided by the CARES Act that was signed on March 27, 2020.

Given the extraordinary pressures that the spread of the coronavirus is placing on the earnings of physician staffing companies, Envision will exchange its existing privately placed notes (not rated) and senior unsecured notes for new term loan borrowings. Moody's will likely consider this transaction as a distressed exchange and this is also reflected in the downgrade of the CFR.

The negative outlook reflects Moody's view that Envision's earnings and liquidity will weaken significantly in 2020. Further, it underscores that the potential for additional distressed exchanges will be directly correlated with the duration and severity of ongoing coronavirus spread.

Ratings downgraded:

Envision Healthcare Corporation

- Corporate Family Rating to Caa2 from B3

- Probability of Default Rating to Caa2-PD from B3-PD

- Gtd. ABL facility expiring 2023 to B1 (LGD1) from Ba2 (LGD2)

- Gtd. senior secured revolving credit facility expiring 2023 to Caa1 (LGD3) from B2 (LGD3)

- Gtd. senior secured term loan due 2025 to Caa1 (LGD3) from B2 (LGD3)

- Gtd. senior unsecured global notes due 2026 to Ca (LGD6) from Caa2 (LGD6)

The outlook, previously stable, has been changed to negative.

RATINGS RATIONALE

Envision's Caa2 Corporate Family Rating reflects significant earnings headwinds and future strains on liquidity as the spread of the coronavirus continues across the US. It also reflects Envision's very high pro forma financial leverage and aggressive financial policies. Pro forma for ongoing cost saving initiatives, adjusted debt to EBITDA was approximately 7.4 times as of December 31, 2019. Moody's expects Envision's financial leverage to rise significantly over the next several months given the significant aforementioned earnings headwinds described above. Further, it is unclear how long it will take for the US to reduce the level of coronavirus infections to a negligible level and thereafter, how quickly the pace of elective procedures ramps. Finally, the Caa2 CFR is constrained by the increasing possibility that legislation designed to address surprise medical bills, or more broadly, out-of-network billing, will be passed into law.

The Caa2 rating is supported by Envision's considerable scale and market position as the largest physician staffing outsourcer. It is also supported by the firm's strong geographic and product diversification within its physician staffing and ambulatory surgery center segments.

The negative outlook reflects Moody's view that Envision's earnings and liquidity will weaken significantly in 2020. Further, it underscores that the potential for additional distressed exchanges will be directly correlated with the duration and severity of ongoing coronavirus spread.

Envision faces significant social risk. Moody's regards the coronavirus outbreak as a social risk under Moody's ESG framework, given the substantial implications for public health and safety. To prepare for a surge of coronavirus patients, acute care hospitals are postponing or cancelling non-essential elective surgical procedures. Further, alternative care settings for such elective procedures, such as ambulatory surgery centers (ASCs), are having to do the same in an effort to conserve valuable surgical supplies (e.g., personal protective equipment). Losing these procedures, which tend to be more profitable than treating sick patients, will result in significant headwinds for physician staffing companies' earnings. Aside from coronavirus, the company has experienced significant negative publicity relating to the patients its physicians treat receiving surprise medical bills (i.e., when they are treated by out of network physicians despite receiving care inside an in-network facility). Legislative proposals currently being considered, if passed, could reduce reimbursement that Envision collects on out-of-network claims and negatively impact firm profitability. Along these lines, UnitedHealth chose to publicize its contract dispute with Envision prior to the two companies negotiating an in-network relationship for 2019. With respect to governance, Envision Healthcare has an aggressive financial strategy characterized by high financial leverage, shareholder-friendly policies, and the pursuit of acquisitive growth. This is largely due to its private-equity ownership by KKR since its leveraged buyout in 2018.

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

The ratings could be downgraded if Moody's expects a greater likelihood than not of future defaults or transactions that the rating agency would consider a distressed exchange.

The ratings could be upgraded if Moody's views Envision's capital structure as being increasingly tenable, for example, as a consequence of a smaller, more manageable debt burden following the distressed exchange. An upgrade could also occur if Moody's expects Envision's operating performance to improve and liquidity to stabilize.

Envision Healthcare Corporation ("Envision") is a leading provider of emergency medical services in the U.S. Envision operates an extensive emergency department, hospital, anesthesiology, radiology, and neonatology physician outsourcing segment. The company also operates 261 ambulatory surgery centers (ASCs). The company is owned by private equity firm ("KKR"). Revenues for the LTM period ended June 30, 2019 were $8.2 billion.

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_1133569.

At least one ESG consideration was material to the credit rating outcome 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.

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.

Jonathan Kanarek, CFA
VP - Senior Credit Officer
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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