S&P Cuts Amsurg (AMSG) to 'B+'; Cites Increased Debt Burden

Standard & Poor's Ratings Services lowered its corporate credit rating on AmSurg Corp. (Nasdaq: AMSG) to 'B+' from 'BB-'. The rating outlook is stable.

At the same time, we assigned a 'B+' issue-level rating to the proposed $1390 million first-lien credit facility, which consists of a $300 million revolving credit facility due 2019 and a $1090 million term loan due 2021. The recovery rating is '3', indicating our expectation for meaningful (50% to 70%) recovery for lenders in the event of a payment default.

Also, we assigned a 'B-' issue-level rating to the proposed $880 million unsecured notes due 2022. The recovery rating is '6', indicating our expectation for negligible (0% to 10%) recovery for lenders in the event of a payment default. The company will use proceeds of the new debt to fund the acquisition of Sheridan, including repaying Sheridan's debt, as well as to repay its outstanding balance of revolving credit facility (not rated) and existing senior secured notes (not rated).

"The downgrade reflects the company's higher debt burden as a result of the transaction," said credit analyst Tulip Lim. "The acquisition of physician staffing company Sheridan doubles the company's size and in our opinion, improves the company's business diversity and its organic growth prospects, but we believe this acquisition is a departure from the company's existing acquisition policy and is an unproven strategy."

The outlook is stable, reflecting our expectation that the company will grow through a combination of organic growth and acquisitions and that margins after deducting minority interest will remain stable or slightly improve.

Upside scenario

We could raise the rating if leverage declines below 5x. This could occur if organic revenue outpaces our expectations and grows at a high-single-digit pace or more and margins expand by 100 basis points. This could occur if Sheridan's market share gains are better than our expectations, the company achieves more than anticipated synergies, higher acuity cases improves mix, and/or acquisition multiples are lower than our expectations.

Downside scenario

We could lower the rating if leverage rises above 7x. This could occur if reimbursement pressure or volume declines lead to organic growth declining at a mid-single-digit pace and margins declining by 300 basis points or more. This would likely result in discretionary cash flow declining to around $100 million.

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