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Rating Action: Moody's confirms MEDNAX's B1 CFR, outlook positive
Global Credit Research - 18 Dec 2020
New York, December 18, 2020 -- Moody's Investors Service ("Moody's") confirmed MEDNAX, Inc.'s ("MEDNAX") B1 Corporate Family Rating (CFR), the B1-PD Probability of Default Rating and the B1 unsecured global note ratings and changed the outlook to positive from rating under review. In addition, Moody's upgraded the Speculative Grade Liquidity rating (SGL) to SGL-1 from SGL-2.
This rating action concludes the rating review for upgrade initiated on September 11, 2020 when MEDNAX announced that it would divest its MEDNAX Radiology Solutions business in a transaction with material deleveraging opportunities.
The confirmation of the B1 CFR reflects Moody's view that MEDNAX will operate on a smaller scale but will have the potential to increase profitability and business stability stemming from a renewed focus on maternal-fetal, newborn and other pediatric subspecialty services. Despite deleveraging related to the divestiture, Moody's decision to confirm rather than upgrade the ratings reflects a degree of execution risk in the face of continuing uncertainty related to the ongoing coronavirus pandemic and its impact on MEDNAX's earnings.
The positive outlook reflects the potential that initial deleveraging from the transaction will be sustained over time and result in a stronger credit profile. Moody's anticipates that the company will materially reduce its financial leverage after paying down its $750 million unsecured notes in January 2021 using the proceeds from the sale of the radiology business, resulting in pro forma debt/EBITDA in low 4 times range. Moody's expects that the company's debt/EBITDA at the end of 2021 will be between 3.75x-4.25x depending on how effectively the company and its new management adapt to a new structure and derive benefits from increased focus on its core business while navigating pressures related to the pandemic, including a declining US birth rate.
The upgrade of the company's SGL rating to SGL-1 reflects an improved outlook for the company's free cash flow as its business recovers from a steep decline during the peak of the coronavirus crisis.
Corporate Family Rating at B1
Probability of Default Rating at B1-PD
$1.0 billion senior unsecured global notes maturing 2027 at B1 (LGD4)
$750 million senior unsecured global notes maturing 2023 at B1 (LGD4) to be withdrawn upon full repayment in January 2021
Speculative Grade Liquidity Rating upgraded to SGL-1 from SGL-2
Outlook changed to positive from rating under review
MEDNAX's B1 Corporate Family Rating reflects the company's moderately high leverage which Moody's expects to be in the 3.75x - 4.25x range at the end of 2021. The company also has exposure to an evolving reimbursement and regulatory environment. While the impact of the company's dispute with UnitedHealth Group Incorporated (A3 long-term issuer rating) will be milder after the divestiture of anesthesia and radiology businesses, the ongoing dispute nevertheless remains an overhang for the company's ratings.
The B1 CFR is supported by the company's strong market position in women's and children's health, good customer diversity, favorable healthcare services outsourcing market trends and good liquidity.
The company's SGL-1 speculative grade liquidity rating reflects Moody's expectation that MEDNAX will maintain very good liquidity over the next year. The company had approximately $294 million in cash as of September 30, 2020, and full availability under its amended $900 million revolver. Moody's anticipate that the company may reduce its revolver size in line with its smaller scale but expects that the revolver will remain fully available. Moody's expects that the company will have approximately $400 million in cash after paying down $750 million in unsecured notes in January 2021. In addition, the company will generate positive free cash flow in the range of $150-$170 million in the next 12 months.
The coronavirus outbreak, the government measures put in place to contain it, and the weak global economic outlook continue to disrupt economies and credit markets across sectors and regions. Moody's analysis has considered the effect on the performance of the company from the current weak U.S. economic activity and a gradual recovery for the coming months. Although economic recovery is underway, it is tenuous and its continuation will be closely tied to containment of the virus. As a result, the degree of uncertainty around Moody's forecasts is unusually high. Moody's regards the coronavirus outbreak as a social risk under its ESG framework, given the substantial implications for public health and safety.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
The ratings could be upgraded if MEDNAX effectively executes its new business strategy focused on prenatal, neonatal, and pediatric services while improving its profitability and scale. Quantitatively, ratings could be upgraded if debt/EBITDA is sustained below 4.0 times.
The ratings could be downgraded if MEDNAX faces reimbursement, volume, or payor mix pressures that will weaken operating performance. Quantitatively, ratings could be downgraded if debt/EBITDA is sustained above 5.0 times.
Based in Sunrise, FL, MEDNAX, Inc. is a leading provider of physician services including newborn, maternal-fetal, pediatric cardiology and other pediatric subspecialty services.
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.
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_1243406.
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.
Kailash Chhaya, CFA Vice President - Senior Analyst 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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