2012年10月18日 / 下午5点30分 / 5 年前

TEXT-S&P raises Team Health Inc rating

Overview
     -- U.S. physician outsourcing provider Team Health plans to amend and 
extend its term loan A to $250 million to repay most of its revolver 
borrowings.
     -- Team Health has sustained a track record of growth coupled with a 
conservative financial policy. In addition, Blackstone's significant reduction 
in equity ownership over the past few months has lowered the risk of a 
debt-financed shareholder-friendly event.
     -- We are raising the corporate credit rating to 'BB' from 'BB-'. We are 
also affirming our 'BB' issue-level rating and downwardly revising our 
recovery rating to '3' from '2' on the company's senior secured credit 
facility.
     -- The stable outlook reflects our expectation that the company will 
manage growth with internally generated cash flows, modestly supplemented by 
incremental borrowings. We expect the debt-to-EBITDA ratio to remain below 4x.
 
Rating Action
On Oct. 18, 2012, Standard & Poor's Ratings Services raised the corporate 
credit rating on Knoxville, Tenn.-based Team Health Inc. to 'BB' from 'BB-'. 
The rating outlook is stable.

At the same time, we affirmed our 'BB' issue-level rating (the same as the 
corporate credit rating) on the company's senior secured credit facility 
consisting of a $225 million revolver due 2017, $250 million term loan A due 
2017, and $247.5 million term loan B due 2018. The company intends to upsize 
its existing $142.5 term loan A in the amount of $107.5 million. We downwardly 
revised our recovery rating on this debt to '3' from '2', reflecting a larger 
debt burden in the event of default. The '3' recovery rating indicates our 
expectation for meaningful (50% to 70%) recovery for lenders in the event of 
payment default.

Rationale
We believe the company will use the proceeds to reduce its outstanding 
borrowings on its revolver resulting from recent acquisitions. The upgrade 
reflects Team Health's sustained track record of growth, coupled with a 
conservative financial policy. In addition, Blackstone's significant reduction 
in equity ownership over the past few months has lowered the risk of a 
debt-financed shareholder-friendly event.

The ratings on Knoxville, Tenn.-based physician and administrative services 
outsourcing provider Team Health Inc. reflect the company's "weak" business 
risk profile, based on its narrow operating focus, exposure to reimbursement 
risk, and high levels of bad debt. The ratings also reflect credit metrics 
consistent with a "significant" financial risk profile.

Standard & Poor's Ratings Services expects organic revenue growth will be in 
the upper-single-digit area over the next year, reflecting the company's 
recent trend of approximately 4% same-contract growth and 5% new-contract 
growth. Hospitals have increasingly been using outsourced services--including 
emergency room services, which contribute significantly to total hospital 
inpatient admissions. This trend has supported the company's growth, which has 
averaged an upper-single-digit percentage rate since 2008. We believe Team 
Health will continue to grow at about this rate, reflecting same-hospital 
contract expansions and new facility relationships. EBITDA margins, which have 
declined moderately amid this new contract growth, should improve slightly 
through next year. In 2011, the company's revenue increased 15%, with 
same-facility contract growth of about 5%. Year to date, revenue increased 17% 
compared with the first half of 2011, with same-contract growth of 4%.

We also expect that the company will maintain financial parameters 
commensurate with a "significant" financial risk profile (debt leverage below 
4x and funds from operations (FFO) to debt of greater than 20%). Following its 
debt reduction from the 2009 IPO proceeds, Team Health has consistently 
maintained debt leverage below 3x. FFO to debt was about 21% as of June 30, 
2012, adjusting for the contingent compensation expense. We expect that the 
company will continue to make accretive tuck-in acquisitions financed with 
free cash flow and some revolver borrowing. The company's acquisition activity 
had typically focused on small physician groups with specialty practices, such 
as anesthesiology, emergency medicine, and hospitalist medicine. Assuming $150 
million of acquisitions in 2012, a similar pace compared with 2011, debt 
leverage will approximate 3x at the end of 2012. Furthermore, we believe that 
Team Health will maintain a financial policy that favors growth over 
cash-based returns, given that its financial sponsor no longer has a 
significant stake or controlling board representation.

Although Team Health has well-established market positions and a diverse payor 
and contract mix, we view its business risk as "weak," reflecting its narrow 
operating focus, exposure to reimbursement risk (17% of revenue from 
Medicare), and high levels of bad debt. The primary contributor to the weak 
business risk profile is the company's concentration in emergency room 
outsourcing and physician staffing. Emergency department and related 
hospitalist services account for about 82% of total revenue, and we believe 
this percentage is unlikely to diminish materially in the near future. 

Reimbursement risk is a key risk factor. The company's net revenue from 
Medicare and Medicaid account for about 17% and 10%, respectively, of its 
total revenue. It is therefore exposed to reimbursement risk, given that 
uncertainty over Medicaid and Medicare reimbursement persists. Self-pay 
patients--a group typically dominated by uninsured individuals--account for 
about 22% of the patient base, and this gives rise to high levels of bad debt. 
Our base case does not assume a positive impact from the Affordable Care Act. 
Although it provides for a significant extension of coverage to uninsured 
patients commencing in 2014, reimbursement levels are uncertain and could 
offset some of the favorable impact. 

Team Health is the second largest participant in this highly fragmented 
market, with about 790 hospital and clinic relationships in 47 states. Its 
size facilitates building competitive advantage in areas such as emergency 
medicine best practices, billing and collections, administration, physician 
recruiting, and professional liability management. Although these 
considerations propel sector consolidation, many small physician groups 
continue to compete for hospital outsourcing contracts locally, putting 
pressure on Team Health's margins.

Team Health has traditionally generated relatively thin operating margins. Its 
specialization makes it vulnerable to changes in the health care industry that 
could be profound, and in turn, might have material consequences for its 
revenue and profitability. In the 12-month period ended June 30, 2012, Team 
Health's EBITDA margin (adjusted for the contingent compensation expense) 
declined to 10% from 11.1% a year earlier. The vast majority of the decline 
was attributable to an increased focus on marketing to win new contracts, 
which are less profitable as the company increases staff to service them. We 
expect margins to improve slightly through the end of this year and next year 
as margins on the newer contracts improve. 

Liquidity
We view the company's liquidity as "strong," with sources of cash likely to 
exceed uses for the next 12 to 24 months. Cash sources include a cash balance 
of $14 million as of June 30, 2012, a $225 million revolving credit facility 
(we expect about $200 million will be available after the close of the 
proposed transaction), and expected free cash flow exceeding $100 million 
annually. We anticipate that cash uses will include some investment in working 
capital, capital spending of about $15 million annually, and acquisitions 
totaling between $125 million and $150 million a year. 

Other assumptions include:
     -- Coverage of uses will exceed 2x for the next two years.
     -- Net sources would be positive even in the event of a 50% EBITDA 
decline.
     -- If the company were to experience a low-probability shock, we believe 
it would refinance, based on its cash generation, revolver availability, and 
access to capital markets.
     -- Team Health has a generally high standing in the credit markets.
 
The company will not face any significant debt maturities until 2017. Its 
credit facility has a first-lien net leverage covenant with an approximate 
cushion of about 50%.

Recovery analysis
For the complete recovery analysis, see Standard & Poor's recovery report on 
Team Health Inc., to be published on RatingsDirect shortly after the 
publication of this article.

Outlook
The rating outlook on Team Health is stable, reflecting our expectation that 
growth will be managed within internally generated cash flows and modestly 
supplemented by incremental borrowings. We expect debt to EBITDA to remain 
below 4x.

We view the possibility of a higher rating to be remote given the company's 
weak business risk profile and our expectation that its business risk will not 
materially improve. On the other hand, if the company switches to a strategic 
policy of aggressively emphasizing growth, leading to a large debt-financed 
acquisitions or shareholder-friendly transactions (greater than $500 million), 
this could lead to a downgrade, because in this scenario, we believe debt 
leverage would likely be sustained above 4x. Similarly, although unlikely in 
the near term, we could lower the ratings as a result of a decrease in 
reimbursement or a spike in labor costs, contributing to at least a 
300-basis-point contraction of EBITDA margins and heightening the company's 
business risk. We believe this could occur with a 3% aggregate reimbursement 
decline, assuming the company has limited ability to reduce expenses.

Related Criteria And Research
     -- Methodology: Business Risk/Financial Risk Matrix Expanded, Sept. 18, 
2012
     -- Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011
     -- Criteria Guidelines For Recovery Ratings, Aug. 10, 2009
     -- Standard & Poor's Revises Its Approach To Rating Speculative-Grade 
Credits, May 13, 2008
     -- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008
 
Ratings List

Upgraded
                                        To                 From
Team Health Inc.
 Corporate Credit Rating                BB/Stable/--       BB-/Stable/--

Ratings Affirmed; Recovery Rating Revised
                                        To                 From
Team Health Inc.
 Senior Secured                         BB                 BB
   Recovery Rating                      3                  2

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