S&P Downgrades TeamHealth (TMH) to 'B+'; Places on Review for Further Downgrade

November 3, 2016 11:17 AM EDT

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S&P Global Ratings lowered its corporate credit rating on Team Health Holdings Inc. (NYSE: TMH) to 'B+' from 'BB-' and placed the rating on CreditWatch with negative implications.

At the same time, we lowered our issue-level rating on Team Health's senior secured debt to 'B+' from 'BB-' to reflect the lower corporate credit rating. The recovery rating on this debt is '4', indicating our expectations for average (30%-50%, at the higher end of the range) recovery in the event of a default.

We also lowered our rating on the company's unsecured debt to 'B-' from 'B'. The recovery rating on this debt is '6', indicating our expectation for negligible (0%-10%) recovery on this debt in a default.

"Our rating actions on Team Health follow the company's announcement that it is being acquired by financial sponsor Blackstone for $6.1 billion," said S&P Global Ratings credit analyst Shannan Murphy. Based on regulatory filings, we believe that leverage, pro forma the transaction, will be over 7x. This is a sharp departure from our prior expectation that the company was committed to deleveraging, and that leverage would decline below 5x over the next few quarters.

While the company's integration of hospitalist and post-acute staffing company IPC Healthcare Inc. has been slower than we expected, we believed that the company was committed to a financial policy of keeping leverage below 5x, and that it could reduce leverage to this level over the next few quarters as it integrated IPC and worked to improve margins. However, based on the LBO announcement, we are no longer convinced that the company is committed to a leverage target below 5x. For this reason, we now view financial policies as negative to the credit rating, and believe that even if the leveraged buyout is not completed as outlined, leverage will likely increase from current levels as the company seeks to maximize value to equity stakeholders.

We intend to resolve our CreditWatch listing when more information becomes available regarding Team Health's eventual capital structure and free cash flow profile.

We could affirm the 'B+' rating and assign a stable outlook if we believe that the company is likely to sustain discretionary cash flow equal to approximately 5% of pro forma debt. This could happen if the company does not complete the planned LBO, or if we believe that the company will be able to reduce costs and raise margins under private ownership.

If the company completes the transaction as planned, and we think free cash flow is likely to be sustained below 5% of adjusted debt, we will likely lower the rating by one notch, to 'B'.

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