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Gloomy outlooks persists for distressed health care services

Illustration of a grimacing face on an EKG monitor.

Illustration: Shoshana Gordon/Axios

The landscape for sponsor-backed health care services platforms may get worse before it gets better, with several businesses at risk of default in 2024, per reports from Moody's and S&P Global Ratings.

Why it matters: As macro headwinds like labor inflation persist, analysts predict a spate of restructurings in the next year.

By the numbers: Out of 192 rated North American-based health care companies listed in Moody's report, almost 21% were rated B3 negative and lower, as of November 20, 2023.

  • More than 60% of the health care companies with that rating have weak liquidity.

Meanwhile, refinancing has become more challenging as elevated interest rates continue to rankle the sector.

  • Debt maturity walls remain modest in 2024 but accelerate in 2025, meaning a likelihood of increased default, per Moody's.

Zoom in: Companies with a negative outlook rated Caa2 or Caa3 — such as Partners Group-backed Eyecare Partners — are at the highest risk of default.

  • "The likelihood of a restructuring, I would say in the next maybe six to 12 months is probably higher" for these companies, Moody's senior credit analyst Jean-Yves Coupin tells Claire.
  • Eyecare Partners reported flat earnings to investors in July as expansion costs hampered growth, Bloomberg reported then.

The big picture: Ratings deterioration will continue in the first half of this year and health care services is particularly vulnerable, per S&P.

  • "These highly leveraged companies are struggling to generate adequate sustained free cash flows given the inflationary environment, particularly on labor, as well as the high interest rate environment," the authors note.
  • Though EBITDA margins either stayed stable or ticked upward this year versus last, they remain below pre-pandemic levels and are unlikely to return to those heights this year.

What's next: The days of levering a deal with 6x debt are over — but beyond that, lenders are likely to be far less lenient in terms of accepting adjustments in financials from sponsors, says Coupin.

  • "There were often a lot of adjustments made to EBITDA in the calculation of leverage," he says. "For instance, any non-recurring items — [like] the expenses related to a leveraged buyout — are considered as one-off and so excluded from the calculation of leverage, which tends to inflate EBITDA."
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