Moody's Cuts Amsurg (AMSG) to 'Ba3'; Notes Leverage Increase on Sheridan Acquisition

Moody's Investors Service downgraded AmSurg Corp's (Nasdaq: AMSG) Corporate Family Rating to B1 from Ba3 and the Probability of Default Rating to B1-PD from Ba3-PD. Concurrently, AmSurg's existing senior unsecured notes are downgraded to B3 from Ba3. In addition, Moody's assigned a Ba2 rating to the company's new $1.4 billion senior secured credit facilities, consisting of a $300 million revolving credit facility expiring in 2019, and a $1.1 billion senior secured term loan B due 2021. Moody's has also assigned a B3 rating to the company's new $880 million senior unsecured notes. The rating outlook is stable. The action follows AmSurg's announcement on May 29, 2014 that the company agreed to acquire Sheridan Holdings, Inc. ("Sheridan") for $2.35 billion. At the close of the transaction, Moody's will also withdraw all of Sheridan's ratings. This rating action concludes the ratings review on AmSurg initiated on May 30, 2014.

The downgrade of AmSurg's CFR reflects the large increase in debt in order to fund the acquisition of Sheridan. Pro-forma LTM adjusted debt to EBITDA for the transaction is 6.1x, for the period ending March 31, 2014. In addition, the downgrade also reflects Moody's concern that this is a transformational acquisition, which will see AmSurg double its revenues to over $2.0 billion, and the potential challenges of integrating such a sizable acquisition in an unrelated medical space.

Proceeds from the new credit facilities, unsecured debt, along with $876 million of equity will be used to fund the purchase of Sheridan, a provider of outsourced physician staffing services to hospitals for anesthesia, neonatology, radiology, pediatrics and emergency departments. The transaction will significantly lower AmSurg concentration in gastroenterology, while also gives the company additional scale and business diversity. Sheridan reported revenues of about $1.0 billion in fiscal 2013.

The following is a summary of rating actions and revised LGD estimates:

AmSurg Corp.:

Ratings assigned:

$300 million senior secured revolving credit facility at Ba2 (LGD 2)

$1,090 million senior secured term loan at Ba2 (LGD 2)

$880 million senior unsecured notes at B3 (LGD 5)

Ratings lowered:

Corporate Family Rating to B1 from Ba3

Probability of Default Rating at B1-PD from Ba3-PD

$250 million senior unsecured notes at B3 (LGD 5) from Ba3 (LGD 3)

Ratings affirmed:

Speculative Grade Liquidity Rating at SGL-2

RATING RATIONALE

The B1 Corporate Family Rating reflects the considerable increase in the debt load of AmSurg, associated with the acquisition of Sheridan. In addition, the rating is constrained by ongoing challenges associated with the economy and the high underemployment rate, which has lowered patient volumes recently. However, we expect the company to focus on reducing debt with available free cash flow following the transaction. In addition, we expect AmSurg's margins to contract as Sheridan's margins are lower.

The rating also benefits from the company's significant scale in both of its segments, which are otherwise very fragmented among other providers. Moreover, AmSurg's rating reflects the relatively stable near term reimbursement environment and the longer-term favorable prospects for the ASC industry.

The stable outlook reflects Moody's expectation that EBITDA will grow, resulting in improvement in pro forma credit metrics. Moody's also expects synergies from the combination of the two companies to begin to be realized in 2014, but that reinvestment in growing the business through further acquisitions and the company's modest capital expenditure requirements will not limit free cash flow or its commitment to deleveraging.

Given that Moody's anticipates improvement in the credit metrics from pro forma levels over the next 12-months, an upgrade of the rating in the near term is not expected. However, the rating could be upgraded if the company is able to reduce and maintain leverage around 4.0 times.

Moody's could downgrade the rating if the company fails to see the expected improvement in financial leverage, experiences disruptions in the integration of the Sheridan operations or increases leverage for acquisitions or shareholder initiatives such that debt to EBITDA will be sustained above 5.0 times.

The principal methodology used in this rating was the Global Healthcare Service Providers published in December 2011. Other methodologies used include Loss Given Default for Speculative-Grade Non-Financial Companies in the U.S., Canada and EMEA published in June 2009. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.

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