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Envision Healthcare, a physician staffing firm, is struggling financially, and those concerns are reflected in a credit rating downgrade from Moody’s Investors Service, taking into account continued work pressures and a decline in volumes related to the COVID-19 pandemic.
According to Moody’s, Envision will see weak liquidity over the next 12 to 18 months, and its $1.4 billion cash reserve is likely to dry up by the end of next year. Moody’s said bankruptcy or restructuring was likely and its Corporate Family Rating (CFR) was downgraded to Caa3 from C.
The ratings action follows a series of transactions including the restructuring of Envision’s senior secured credit facilities and the issuance of a new revolving credit facility in July 2022 and other debt in April 2022 at its subsidiary AmSurg. Moody’s classified Envision’s transactions as a distressed exchange because the loans were exchanged at a price below par. This is a standard as defined by Moody’s.
Envision’s capital structure is not sustainable, the rating agency said. Repayment rates for much of the company’s debt will be low. Moody’s expects operating performance to continue to deteriorate due to continued industry pressures and rising interest rates that will nearly double interest expenditure.
The refinancing hasn’t significantly reduced debt, and while maturities have been extended, Envision remains at risk of defaulting on its debt.
WHAT IS THE IMPACT
There are some factors that mitigate some of the risks. Envision has significant size and market position as one of the largest physician outsourcers in the country, Moody’s said. The Company has strong product diversification in the physician staff and ambulatory surgery center segments.
However, continued business pressure and increased interest expense will mean that Envision’s free cash flow will be significantly negative in 2022 and beyond.
In assigning the new ratings, Moody’s considered the expected loss on Envision’s debt, which the rating agency expects to be material. Moody’s noted that to the extent that Envision’s assets are recovered, the portion of the proceeds from the term loans will be applied to Envision’s senior secured loan before other debt. But material losses are expected.
The outlook is stable for both Envision and subsidiary AmSurg. Moody’s believes the company will continue to experience difficulties and that there is an increased risk of default given weak liquidity and risks related to the continued sustainability of the business.
THE BIGGER TREND
Envision operates an extensive outsourcing segment for ER, hospital, anesthesiology, radiology and neonatal physicians. The company also operates more than 250 outpatient surgery centers in 34 states and is owned by private equity firm KKR. Revenue for the period ended June 30 was approximately $7 billion.
While unlikely in the near term, it would require a material improvement in Envision’s cash position — including the refinancing of existing debt — to support an upgrade. Envision also needs an improvement in its operational performance, Moody’s said.
Earlier this month, Envision filed a lawsuit against UnitedHealthcare over the insurer’s denied claims, sparking a counterclaim from UHC alleging that Envision fraudulently upcoded claims for services provided to UHC members.
UHC removed Envision from its network last year, claiming the company’s costs were not in line with the market. According to Envision’s lawsuit, UHC rejected about 18% of the commercial claims it filed — a number that swelled to 48% of all claims after Envision was removed from UHC’s networks, the firm said. And for the most acrimonious claims, Envision accuses UHC of rejecting 60% of those claims.
Meanwhile, in June, doctors at Corona Regional Medical Center and Temecula Valley Hospital in California threatened to leave the hospitals if for-profit owner Universal Health Services changes the human resource management firm to Envision, according to an emergency physician who runs the hospitals, human resources firm Emergent Medical Associates (EMA ).
Physicians opposed Envision, citing concerns about lower pay and staffing resulting in lower quality of care.