Summit Behavioral Healthcare, LLC — Moody’s affirmed Summit Behavioral Healthcare’s B3 CFR; outlook stable


Rating Action: Moody’s affirmed Summit Behavioral Healthcare’s B3 CFR; outlook stableGlobal Credit Research – 10 Jan 2022New York, January 10, 2022 — Moody’s Investors Service (“Moody’s”) affirmed Summit Behavioral Healthcare, LLC’s (“Summit”) ratings, including the B3 Corporate Family Rating (“CFR”), B3-PD Probability of Default (“PDR”), B2 first lien senior secured rating, and Caa2 second lien senior secured rating. The outlook remains stable.The affirmation follows Summit’s acquisition of Strategic Behavioral Health in December 2021 that is funded with a $150 million increase in first lien term loan and new sponsor equity. The affirmation reflects Summit’s elevated financial leverage with debt/EBITDA of around 9.5x at the end of 2021 pro forma for the acquisition. While Moody’s expects leverage to decrease through earnings growth it is nonetheless expected to remain high at approximately 6.5x by the end of 2023, resulting in a weakly positioned B3 Corporate Family Rating. Summit has no headroom to make additional debt-funded acquisitions until it reduces its leverage. Further, Summit faces significant execution risk over the next 12 months integrating the acquisition.Rating Actions:..Issuer: Summit Behavioral Healthcare, LLC…. Corporate Family Rating, Affirmed B3…. Probability of Default Rating, Affirmed B3-PD….Senior Secured 1st Lien Revolving Credit Facility, Affirmed B2 (LGD3)….Senior Secured 1st Lien Term Loan, Affirmed B2 (LGD3)….Senior Secured 2nd Lien Term Loan, Affirmed Caa2 (LGD5)Outlook Actions:..Issuer: Summit Behavioral Healthcare, LLC….Outlook, Remains StableRATINGS RATIONALEThe B3 rating reflects the company’s modest scale and narrow business focus on substance use disorder (“SUD”) treatment and acute psychiatric treatment (“Acute Psych”). Further, Moody’s believes Summit will continue to expand aggressively through growth of existing facilities, new facility openings, and acquisitions. There is risk that the company’s growth strategy will lead to lower utilization at facilities or failure to earn adequate returns on its investments.The rating is supported by Summit’s good reputation in the substance abuse treatment market and solid – albeit short – track record of growth that Moody’s expects will continue. Given the company’s solid profit margins and low maintenance capex, Moody’s expects the company to generate near break-even free cash flow after making likely investments in expansion capex. The B3 rating is also supported by Summit’s good geographic and customer diversity. The company has some exposure to direct government reimbursement (about 30% of revenue) and maintains in-network contracts with its commercial payors, with whom it generates the majority of its revenue.Summit will maintain adequate liquidity over the next 12-18 months, with no near-term debt maturities. While the company has little cash following the acquisition, liquidity is supported by a 5-year revolving credit facility that provides for borrowings of $75 million. Moody’s expects the company may rely temporarily on the revolver over the next 12 months. Alternative sources of liquidity are limited as substantially all assets are pledged. There is no financial covenant on the term loans.The stable outlook reflects our view that Summit will reduce its currently high leverage towards 6.5-7.0 times range over the next 12-18 months and will maintain at least adequate liquidity.Social and governance considerations are material to Summit’s credit profile. As a provider of addiction and mental health treatment, Summit faces high social risk. Any incident, such as a patient fatality or a patient not receiving appropriate care at one of Summit’s facilities, can result in increased regulatory burdens, government investigations, and negative publicity. Positive social considerations include the societal benefits from Summit’s behavioral health and addiction treatment programs. Among governance considerations, Summit’s financial policies under private equity ownership are aggressive, reflected in high debt levels and acquisitive growth strategy.FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGSThe ratings could be downgraded if the company’s expansion strategy fails to produce profitable revenue growth or leads to operating disruption. If Summit engages in debt-financed acquisitions or dividends, the ratings could also be downgraded. Further, weakening of liquidity, sustained negative free cash flow, or EBITA interest coverage below 1 time could lead to a downgrade.The ratings could be upgraded if Summit demonstrates a track record of positive free cash flow, and effectively manages its growth with prudent financial policies. Increased scale and diversification would also support an upgrade. Further, the ratings could be upgraded if adjusted debt to EBITDA is sustained below 6 times.Summit Behavioral Healthcare, LLC is a leading service provider of substance abuse and mental health treatment in a highly fragmented industry. Summit operates 25 facilities in 16 states with a focus on inpatient, detox, residential and outpatient services. The company has been growing rapidly reflecting a strategy focused on acquisitions and the opening of new facilities. Summit generated $224 million revenue in the LTM to June 30, 2021. Summit is owned by private equity firm Patient Square Capital.The principal methodology used in these ratings was Business and Consumer Services published in November 2021 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1287897. 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Further information on the EU endorsement status and on the Moody’s office that issued the credit rating is available on www.moodys.com.The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody’s affiliates outside the UK and is endorsed by Moody’s Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK 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. Jean-Yves Coupin Vice President – Senior Analyst Corporate Finance Group Moody’s Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. 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