Select Medical Holdings (SEM) Outlook Lowered to Negative by S&P

Standard & Poor's Ratings Services today affirmed its ratings on Select Medical Corp. (NYSE: SEM), including the 'B+' corporate credit rating, and revised the outlook to negative from stable.

Absent details on the planned funding sources, our issue-level ratings and recovery ratings are unchanged at this time.

"The revision of the outlook to negative reflects the approaching headwinds and uncertainty from the adverse change in patient eligibility criteria for long-term acute-care services which begin to go into effect in October 2015," said Standard & Poor's credit analyst David Kaplan.

The Concentra Inc. acquisition and joint venture with private equity sponsor Welsh, Carson, Anderson & Stowe XII L.P, provides Select with incremental diversification to the company's core business of operating long-term acute-care (LTAC) facilities. This only modestly improves business risk within the "weak" category. This transaction also increases our estimate of adjusted debt leverage for 2015 by about 0.2x, to 4.7x. We expect leverage to rise to 5.2x in 2016, stemming from the adverse changes to LTAC reimbursement which begin to go into effect in October, and to improve modestly to 5.1x in 2017.

Our 'B+' corporate credit rating reflects our assessment of a "weak" business risk profile and "aggressive" financial risk profile for the company.

Our negative outlook on Select Medical reflects heightened uncertainty relating to the financial impact from the adverse change in patient eligibility criteria for LTAC services which begin to go into effect in October 2015. We see the potential for leverage to rise and remain above 5x in 2016 and beyond stemming from potential pressures on revenue and margins.

We could lower our rating if we conclude that adjusted debt leverage will likely remain above 5x on a sustained basis. This could occur in 2016 if revenues decline by 5% and margins are compressed by 100 basis points, and the company continues to allocate free cash flow primarily for shareholder returns.

We could revise the outlook to stable if we gain confidence the company will maintain leverage below 5x on a sustained basis, either by offsetting the lost revenue, managing its costs well enough to offset margin pressures, or prioritizing debt reduction.

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