Fitch Ratings has downgraded its Long-Term Issuer Default Rating (IDR) on
Fitch previously assumed stabilizing fundamentals and expected progress in de-risking the capital structure, with a focus on refinancing the company's non-extended term loan due
With Fitch-calculated leverage now exceeding 8.0x through the senior secured debt and 10.0x overall, Fitch sees access to the debt capital markets to refinance significant near-term maturities as increasingly limited. This is the key driver of Fitch's rating action, as Fitch sees
Key Rating Drivers
Leading Position in Increasingly Challenged Subsector: TMH is one of a handful of large national providers in the fragmented outsourced healthcare staffing market, with leading scale enhancing its capabilities in contracting with hospital systems and commercial health insurers. That said, with revenues sourced primarily from contracted physician services and emergency department (ED) staffing comprising the majority thereof, Fitch expects top line growth prospects to be constrained by secular pressure on ED care pricing and volumes (especially lower-acuity visits).
Sources of secular volume pressure include both larger, better-capitalized health insurers and the expanding universe of capitated value-based care providers focusing on reducing ED use (with increasingly prevalent high-deductible plans constraining demand) and increasing competition from alternative settings including urgent care clinics, evidencing the subsector's weak barriers to entry. Volumes will also face pressure from Medicaid eligibility redeterminations permitted following the COVID-19 Public Health Emergency, which is now expected to be extended until at least
On the pricing front, ED care reimbursement faces a 10% cut in 2023 on Medicare cases comprising about 1/4 of revenue absent uncertain legislative intervention. Fitch also expects commercial rates to remain pressured by the evolving implementation of the No Surprises Act (NSA), with health insurers allegedly engineering low median in-network payment rates for ED care to depress
Pandemic-Driven Volatility Further Pressuring Margins: The ebb and flow of the COVID-19 pandemic has been disrupting operations, with depressed ED patient visits (and elective volumes generally) driving inefficiencies in clinical labor expense (comprises >80% of TMH costs), given the need to maintain hospital staffing readiness. The cost of staffing the ED to handle volatile volumes that have increasingly disappointed in recent quarters, and the inefficiency of ED physicians handling sub-license tasks amid constrained nursing labor availability, have created negative operating leverage and pressured EBITDA margins. Fitch sees limited opportunity for TMH to improve margins in the near-term, which in turn has negative implications for its ability to materially reduce leverage from unsustainably-elevated levels.
Elevated Leverage and Near-Term Maturities Pose Increasing Default Risk: Fitch sees heightened near-term risk of a distressed debt exchange or principal payment default with leverage now exceeding 8.0x through the senior secured loans and 10.0x overall, as this is likely to limit TMH's access to capital markets to refinance its near-term maturities. Key among these are the
Even if lenders are inclined to be supportive, a refinancing and/or extension of these near-term debt maturities may be further complicated by the maturity of its
Liquidity Supports Ordinary-Course Operations; FCF Positive but Limited: While liquidity as of
Fitch also expects working capital could be a further constraint, with DSO in A/R potentially increasing from the bottom of its historical range of 65-70, cash deposits increasing to support an anticipated ramp-up in payor litigation claims, and accrued liabilities declining after paying out about
Other Challenges Remain: Margins and FCF remain under pressure from the evolving implementation of the
Derivation Summary
The 'CCC' Long-Term IDR on TMH reflects secular and pandemic-driven headwinds to ED care volume and pricing, which have compressed operating margins and increased leverage to levels that Fitch believes are unsustainable. The company's credit profile benefits from good depth and competitive scale relative to peers
While the company's credit profile has also benefitted historically from low capex needs facilitating more consistent and stable FCF generation than health care providers generally, Fitch anticipates only modest positive FCF beyond 2022 due to recent compression in operating margins and the company's significant balance sheet exposure (at least 75%) to rising interest rates.
Moreover, the positive FCF that TMH has generated historically has largely funded expansion as opposed to reducing leverage by paying down debt. Fitch's ratings further reflect its view that high leverage, now exceeding 8.0x through its senior secured debt and 10.0x overall, is likely to limit TMH's access to capital markets to refinance near-term debt maturities, elevating near-term risk of either a distressed debt exchange or principal payment default.
The 'B-'/'RR2' ratings for TMH's senior secured debt, including its revolver and term loans, are notched above the 'CCC' Long-Term IDR to reflect Fitch's expectation of a 71%-90% recovery under a bankruptcy scenario. The 'CC'/'RR6' rating on TMH's senior unsecured notes is notched below the 'CCC' Long-Term IDR to reflect Fitch's expectation of a 0%-10% recovery under a bankruptcy scenario, which solely includes an assumed 1% concession payment from senior secured creditors.
Fitch estimates an enterprise value (EV) on a going concern basis of
The primary drivers of the post-reorganization EBITDA estimate are the negative implications of commercial payor contract disputes and the assumed persistence of constrained profitability. To date, Fitch does not believe that the COVID-19 pandemic has altered the longer-term valuation prospects for the healthcare services industry and Fitch's post-reorganization EBITDA and multiple assumptions for TMH are unchanged from the last ratings review.
The 7.0x multiple used for TMH reflects a stressed multiple versus the multiple of approximately 11.0x that
Fitch's recovery analysis also assumes the company's
Key Assumptions
Fitch's Key Assumptions Within Our Rating Case for the Issuer:
Revenue growth in the low-single digits through 2025, surpassing pre-pandemic revenue in 2023;
EBITDA margins sustained in the 7%-8% range over the forecast period;
Acquisitions totaling
CapEx of
Leverage sustained above 8.0x over the forecast period; and
No allocation of FCF towards voluntary debt repayment.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
Extension of maturity or refinancing of its
Refinancing of its
Significant improvement in operating margins, reduction in leverage and improvement in capital markets conditions supporting a refinancing of near-term debt maturities.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
Announcement of transactions comprising a distressed debt exchange as defined by Fitch;
Failure to extend the maturity of or refinance its
Failure to refinance its
Failure to pay interest and debt principal when due.
Best/Worst Case Rating Scenario
International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from '
Liquidity and Debt Structure
Adequate Sources of Liquidity: As of
Issuer Profile
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG Considerations
TMH has an ESG Relevance Score of '4' for Exposure to Social Impacts due to societal and regulatory pressures to contain growth in healthcare spending in the
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg.
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