Rating Action: Moody's assigns Ba3 rating to DaVita's new unsecured notes
Global Credit Research - 06 Aug 2020
New York, August 06, 2020 -- Moody's Investors Service ("Moody's") announced today that it assigned a Ba3 rating to DaVita Inc.'s ("DaVita") proposed senior unsecured global notes due 2031. There is no change to DaVita's existing ratings, including its Ba2 Corporate Family Rating (CFR), Ba2-PD Probability of Default Rating, Ba1 senior secured rating, and Ba3 unsecured rating. There is also no change to the stable outlook.
Proceeds from the new notes will be used along with existing cash to repay DaVita's senior unsecured global notes due 2025, including accrued interest and fees and expenses. Moody's views the transaction as a credit positive, as it will modestly reduce DaVita's annual interest expense and lengthen its maturity profile.
Senior unsecured global notes due 2031 at Ba3 (LGD5)
DaVita Inc.'s Ba2 CFR is constrained by the company's moderately high financial leverage -- pro forma debt/EBITDA is approximately 4.1 times as of June 30, 2020 -- and its heavy reliance on commercially insured dialysis patients for the vast majority of profits and free cash flow. DaVita will continually be challenged to maintain a sufficiently large commercially insured end stage renal disease (ESRD) patient population to sustain its profitability. ESRD patients automatically convert to Medicare after a maximum of 33 months on dialysis. DaVita is reimbursed by Medicare at a fraction of what it earns from commercial payors. The CFR also reflects the company's near total reliance on the ESRD market which makes the company vulnerable to potential unfavorable market developments. These include further slowing in the growth of ESRD patient volumes and uncertainties regarding the availability of charitable premium assistance for dialysis patients. DaVita also faces uncertainties around the potential implementation of new payment models designed to accelerate penetration into the home dialysis setting and increase the supply of healthy kidneys for transplant. Finally, Moody's expects the COVID-19 pandemic to have a modestly negative impact on DaVita's operating performance, due largely to incremental operating costs and some modest headwinds to volume growth.
The Ba2 CFR is supported by the company's considerable scale and extensive network of dialysis outpatient clinics across 46 US states. It is also supported by the recurring revenue stream attributed to dialysis, as the treatment is critically important to patients who require treatment three times per week indefinitely. The CFR also reflects DaVita's strong free cash flow and very good liquidity.
The stable outlook reflects the underlying stability of DaVita's cash flows, supported by continued growth in the population of people needing dialysis, of about 2% per year.
Moody's regards the coronavirus outbreak as a social risk under its ESG framework, given the substantial implications for public health and safety. That said, Moody's believes the related impact on Davita's treatment volumes and operating costs will be modest. As a dialysis company, DaVita faces rising social risk as it pertains to the significant disparity between the reimbursement it receives for treating commercially insured patients and the amount it receives for treating patients insured by Medicare. Caring for dialysis patients is very costly, because they often suffer from co-morbidities beyond end-stage renal disease. These factors have induced various states to pursue legislation, that if passed, could reduce DaVita's and other dialysis companies' profits. Further, an executive order in mid-2019 aiming to increase the supply of kidney transplants and shift more dialysis treatments into the home setting could have mixed effects on dialysis companies. If efforts to increase the supply of kidneys available for transplant are successful, dialysis providers would be negatively impacted by slower ESRD patient volume growth. Longer-term, the Trump administration hopes to reduce the incidence of ESRD by 25% by 2030. The executive order also aims to reduce the number of people who receive dialysis treatment at dialysis centers and instead have them treated in their homes. This element of the order could be credit positive for DaVita, because reimbursement is comparable across dialysis settings while the costs of in-home dialysis (primarily peritoneal dialysis) are slightly less than those associated with hemodialysis administered in the dialysis centers. Moody's expects mandatory and voluntary kidney care models associated with the executive order to go into effect in April 2021.
From a governance perspective, DaVita has generally exhibited aggressive financial policies as evidenced by significant, and sometimes debt-funded, share buybacks. However, since the beginning of the COVID-19 pandemic through July, the company has not completed any share repurchases. DaVita also elected to return $250 million of grant funding received from the Coronavirus Aid, Relief, and Economic Security (CARES) Act.
The SGL-1 Speculative Grade Liquidity Rating reflects Moody's expectation that DaVita will maintain very good liquidity over the next 12 to 18 months through its combination of cash, marketable securities and revolver availability.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
The ratings could be upgraded if DaVita sustains debt to EBITDA below 3.25 times while demonstrating discipline with respect to acquisitions and shareholder returns.
The ratings could be downgraded if material rate reimbursement cuts are implemented by either commercial insurers or Medicare. A downgrade could also result if debt to EBITDA is sustained above 4.25 times or demand for outpatient dialysis services slows.
DaVita, Inc., headquartered in Denver, CO, is an independent provider of dialysis services primarily in the US for patients suffering from end-stage renal disease (chronic kidney failure). The company also provides home dialysis services, inpatient dialysis services through contractual arrangements with hospitals, laboratory services and other ancillary services. DaVita reported $11.5 billion of revenues from continuing operations for the LTM period ended June 30, 2020.
The principal methodology used in this rating 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.
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.
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.
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Jonathan Kanarek, CFA VP - Senior Credit Officer 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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