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Moody's Downgrades Acadia's (ACHC) Outlook, Affirms Ratings

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Credit rating giant Moody's Investors Service recently assigned ratings to Acadia Healthcare Company, Inc. (ACHC - Free Report) , which includes the B1 Corporate Family Rating and the B1-PD Probability of Default Rating. The credit rating agency also confirmed the company’s Ba2 senior secured rating, the B3 unsecured rating and the SGL-2 Speculative Grade Liquidity Rating. The outlook of these ratings has been changed to negative from stable.

Why the Downgrade?

The downgrade in the ratings outlook reflects the challenges the company faced, related to its profit margins in the UK business. Moreover, there is a high chance that the company’s adjusted debt/EBITDA will stay above 5.5x over a span of next 12 to 18 months unless Acadia Healthcare is able to expand its margins in the UK business. Another factor that has led to this outlook is the curbed cushion under the company's bank credit facility covenants in case it is unsuccessful in achieving earnings growth in at least mid-single digits.

Notably, the assertion of the B1 Corporate Family Rating is supported by the constant solid performance of the company’s behavioral health business in the United States, which contributes to more than 60% of revenues and 80% of EBITDA. The company boasts stable profit margins and witnessed consistent revenue growth over the last many years. Also, it enjoys a strong operating cash flow despite its investments. Moody’s has also considered the company’s flexibility in decreasing its growth capex, which in turn, would enable a significant cash flow and deleveraging.

Factors That Can Influence the Ratings

Acadia Healthcare’s ratings are constrained due to its high financial leverage and reliance on government reimbursement in both the United States and the United Kingdom. It is exposed to currency fluctuation and changes in the UK economic conditions. There are also risks related to its rapid growth pace through strategic buyouts, opening of new facilities and addition of beds in the current facilities.

The ratings can be downgraded if debt to EBITDA is sustained above 5.5 times or there are adverse reimbursement developments. Moody's can also lower the ratings if the company’s financial policy becomes more aggressive or if its liquidity deteriorates.

The credit rating giant can upgrade the ratings if the company reduces and retains its debt/EBITDA below 4.5 times and balances its expansion opportunities plus purchases with decreased debts. There is also a scope for upgrade provided there is less dependence on Medicaid and the UK's National Health Service supports the upgrade.

Shares of this Zacks Rank #4 (Sell) company have declined 2.5% in a year’s time against its industry’s rally of 16.7%.

Key Picks

Investors interested in the medical industry might take a look at some better-ranked stocks like Molina Healthcare, Inc. (MOH - Free Report) , Humana Inc. (HUM - Free Report) and Anthem, Inc (ANTM - Free Report) .

Molina provides Medicaid-related solutions to meet the health care needs of low-income families and individuals plus assist the state agencies in administration work of the Medicaid program across the United States. The stock sports a Zacks Rank #1 (Strong Buy) and delivered average four-quarter beat of nearly 82.55%. You can see the complete list of today’s Zacks #1 Rank stocks here.

Humana operates as a health and well-being company in the United States. It has a Zacks Rank #2 (Buy) and pulled off average four-quarter positive surprise of 4.73%.

Anthem operates as a health benefits company in the United States. It holds a Zacks Rank of 2. The company has a trailing four-quarter earnings surprise of 5.11%.

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