The SGL-1 Speculative Grade Liquidity rating reflects the company's very good liquidity profile. Cash balances are approximately $173 million on a proforma basis and Moody's expects the company will fund all basic cash obligations from internal sources over the next 12 to 18 months. The company has a $175 million revolving credit facility which Moody's expects will remain substantially unused. The company's secured term loan agreements are subject to maximum leverage and minimum fixed charge covenants which have ample headroom.
Social considerations are a factor in AdaptHealth's ratings. Medical device companies face moderate social risk overall. However, they regularly encounter elevated elements of social risk, including responsible production as well as other social and demographic trends. Medical device companies will generally benefit from demographic trends, such as the aging of the populations in developed countries. That said, increasing utilization may pressure payors, including individuals, commercial insurers or governments to seek to limit use and/or reduce prices paid. Moody's expects AdaptHealth will benefit from demographic trends that will drive higher utilization of products distributed by the company, such as respiratory, sleep apnea and diabetes. Many of the products distributed by AdaptHealth are subject to competitive bid requirements by regulators and could pressure pricing, though this risk is mitigated by the company's diversity by product line. Moody's regards the coronavirus outbreak as a social risk under our ESG framework, given the substantial implications for public health and safety. Moody's expects the near-term impact from the coronavirus outbreak to be manageable as the significant majority of its products are used at-home for chronic medical conditions.
From a governance perspective, the ratings reflect Moody's expectations that AdaptHealth's will continue to prioritize acquisitions consistent with its stated longer-term growth objectives. At the same time the company has articulated a moderate target leverage ratio of debt/EBITDA of approximately 3 times (or approximately 4.2x as adjusted by Moody's, if patient capital expenditures are deducted from EBITDA).
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
Ratings could be upgraded if the company sustains debt/EBITDA below 4 times (after deducting patient equipment capital expenditures from EBITDA) while maintaining a good liquidity profile and a sustained track record of successful acquisition integration. Further diversification by payor, product and geography, and increased scale, would also be positive credit factors over time.
Ratings could be downgraded if the company is unable to successfully integrate acquisitions or if financial policies became more aggressive. Quantitatively ratings could be downgraded if the company sustains debt/EBITDA above 5 times (after deducting patient equipment capital expenditures from EBITDA) or if liquidity erodes.
Headquartered in Plymouth Meeting, PA, AdaptHealth is a provider of home healthcare equipment and medical supplies to the home and related services in the United States. The company's products cover a range of products to address chronic conditions such as sleep therapies, oxygen and related therapies in the home and other home medical devices and supplies needed by chronically ill patients with diabetes, wound care, urology, ostomy and nutrition supply needs. AdaptHealth services over 1.7 million patients annually through a network of 247 locations in 40 states on a pro-forma basis. Revenues, pro-forma for recent acquisitions, exceed $1 billion.
The principal methodology used in these ratings was Business and Consumer Service Industry published in October 2016 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1037985. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.
REGULATORY DISCLOSURES
For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security 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.
The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.
These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.
Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.
Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.
At least one ESG consideration was material to the credit rating action(s) announced and described above.
The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.
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.
Scott Tuhy Senior Vice President 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, CFA 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
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