New York, March 28, 2019 -- Moody's Investors Service (Moody's) today downgraded the ratings
of Prospect Medical Holdings, Inc.'s ("Prospect"),
including its Corporate Family Rating (CFR) to B3 from B2 RUR-Down
and its Probability of Default Rating to B3-PD from B2-PD
RUR-Down. The rating agency also downgraded Prospect's
senior secured first lien term loan rating to B3 from B1 RUR-Down.
Moody's changed the outlook, previously on review, to
negative. These actions resolve the review for downgrade initiated
on February 12, 2019.
The downgrade of the CFR to B3 reflects the recent spike in Prospect's
financial leverage and the company's adequate liquidity profile.
The negative outlook reflects uncertainty relating to both the timing
and magnitude of improved operating performance that Prospect will achieve.
The downgrade of the senior secured term loan to B3 reflects both Prospect's
weakened credit profile and the upsizing of its ABL facility. In
the context of the B3 CFR, Moody's views the recovery for
senior secured term loan lenders to be average in a default scenario.
Pro forma for several of the hospital operator's business initiatives,
Moody's views Prospect's adjusted debt to EBITDA as being approximately
7.3 times at December 31, 2018. This leverage calculation
reflects Moody's view that Prospect will achieve roughly 75%
of the dollar value of its various business initiatives. Without
the incremental effect of these initiatives above and beyond what the
credit agreement permits, Moody's estimates leverage to be
roughly 9.6 times. Since completing a debt-funded
sponsor dividend in early-2018, Prospect's leverage
has increased significantly. Deleveraging has been challenged by
a combination of weak operating performance at certain hospitals acquired
in 2016 and at its Medical Group segment, and longer-than-expected
delays to receive California Quality Assurance Fee (QAF) reimbursement
payments. Management expects to receive its first QAF 5 payment,
approximately $83 million, in May 2019. At current
leverage levels, QAF payments relating to services performed in
2017-2018 must be used to repay term loan borrowings. As
a result, even when QAF payments are received, they will not
be a source of ongoing liquidity but will facilitate deleveraging.
Prospect exited its first quarter ending December 31, 2018 without
any unrestricted cash and $20 million of availability on its ABL
facility (unrated), thereby limiting financial flexibility.
In response to this, Prospect's sponsor and certain members of management
provided the company with a $41 million cash infusion on January
25, 2019. Further, the company increased the size of
its ABL facility in March 2019. These actions will leave Prospect
with adequate liquidity that will help it manage through its typically
volatile cash flow cycle.
Ratings downgrades:
Prospect Medical Holdings, Inc.
Corporate Family Rating to B3, from B2 RUR-Down
Probability of Default Rating to B3-PD, from B2-PD
RUR-Down
Senior secured first lien term loan due 2024 to B3 (LGD 3), from
B1 (LGD 3) RUR-Down
The rating outlook, previously on review, was changed to negative.
RATINGS RATIONALE
Prospect's B3 Corporate Family Rating reflects the company's very high
financial leverage, shareholder-friendly financial policies,
and a history of failing to meet projections. The rating is also
constrained by the company's high concentration of revenue and earnings
in only a few markets, and significant reliance on Medicaid programs,
particularly those in California and Pennsylvania. Moody's believes
there is longer-term risk to relying heavily on state Medicaid
programs due to state and federal budget constraints. Further,
Moody's believes that hospital industry-wide challenges to growth
and margin expansion, including weak patient volume trends and increasing
cost pressures, will constrain organic earnings and cash flow growth
going forward. The B3 is supported by Prospect's good scale with
more than $3 billion of net revenue. Prospect also benefits
from strong competitive positions in its markets. It typically
operates low-cost community hospitals and offers other healthcare
services in its markets. As a result, it is able to manage
integrated patient care profitably even for patients covered by Medicaid,
which typically pays hospitals the lowest rates.
The negative outlook reflects Moody's view that Prospect will continue
to operate with aggressive financial policies, very high financial
leverage, and adequate liquidity over the next 12-18 months.
It also reflects uncertainty relating to both the timing and magnitude
of improved operating performance that Prospect will achieve.
The ratings could be downgraded if the company's cost reduction
efforts do not yield significant savings. Weak operating performance
or a deterioration of liquidity could also result in a downgrade.
The ratings could be upgraded if the company adopts more conservative
financial policies. An upgrade could also result if the company
sustains debt to EBITDA below 6.0 times.
Headquartered in Los Angeles, California, Prospect Medical
Holdings, Inc. provides health care services through a network
of acute care and behavioral hospitals. Through its Medical Group
business unit, the company provides administrative management of
health care services to independent physician organizations that cover
members through a network of primary care doctors and specialists.
Prospect generates revenues of approximately $3.2 billion.
The company is owned by certain funds of private equity firm Leonard Green
& Partners L.P. and members of the company's management
team.
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 or category/class of debt,
this announcement provides certain regulatory disclosures in relation
to each rating of a subsequently issued bond or note of the same series
or category/class of debt 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.
Please see the ratings tab on the issuer/entity page on www.moodys.com
for additional regulatory disclosures for each credit rating.
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
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
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
