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Pandemic threatening high-yield healthcare liquidity

A number of high-yield healthcare issuers have defaulted since the start of the crisis, and near-term credit risk remains elevated.

Jeff Lagasse, Associate Editor

As if the numerous other financial challenges for the healthcare industry weren't enough, the COVID-19 pandemic is exacerbating speculative-grade issuer liquidity challenges, due in part to providers' lost patient volumes as a result of canceled elective surgeries, according to a new report from Fitch Ratings.

Specialty pharmaceutical companies with material debt maturities and opioid-contingent obligations are the most susceptible. A number of high-yield healthcare issuers have defaulted since the start of the crisis, and near-term credit risk remains elevated. Deleveraging will depend on the pace of EBITDA recovery and issuers' willingness to reduce debt, Fitch found.

This year's edition of "The Checkup: High-Yield Healthcare Handbook (A Comprehensive Analysis of High-Yield U.S. Healthcare Companies)" focuses on the effects of the coronavirus on the credit profiles of 22 of the largest issuers of high-yield debt in the U.S. healthcare industry. It's a compendium of the business profiles and capital structures of healthcare service providers, specialty pharmaceutical manufacturers, and medical device and diagnostics companies that have a total of $173 billion of debt.

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WHAT'S THE IMPACT?

One-third of the issuers highlighted in the report face a negative credit metric trajectory, or have a Negative Rating Outlook due to forecast EBITDA declines and increased debt to shore up liquidity during the pandemic. These issuers include Acadia Healthcare (b+*/negative), Community Health Systems (CCC), Endo International (ccc+*), Jazz Pharmaceuticals (bb-*/negative), Mallinckrodt (ccc–*), Owens & Minor (CCC+), and Teva Pharmaceuticals (BB-/Negative).

Median year-end 2020 leverage, measured as total debt/EBITDA, is forecast to be 5.3x, up from 4.9x at year-end 2019, for the 22 issuers included in this year's handbook. A median revenue decline of 4.5% is projected for 2020, with a median rebound to 5.9% in 2021. Yet healthcare service providers are projected to experience revenue declines of up to 25% in 2020 with a recovery in 2021 that does not bring the business back to the level of revenue seen in 2019.

Median operating EBITDA margin contraction is forecast to exceed 200bps to 17.2% this year, since temporary cost-cutting is not expected to fully offset lost revenue on higher-margin offerings. Margins are not projected to fully recover to 2019 levels in 2021, since the effects of the pandemic may linger through 2021. Pricing headwinds persist.

Healthcare service providers are more exposed to the effects of the pandemic due to lower demand for elective services and a reduced ability to cut operating expenses relative to other healthcare companies, due to high fixed-cost structures. Fiscal stimulus, through the Coronavirus Aid, Relief and Economic Security Act, provided an emergency source of liquidity for most healthcare services companies via a combination of grants, loans and the deferral of certain operating expenses.

THE LARGER TREND

Quorum Health, which operates rural acute care hospitals, filed for Chapter 11 in April due to an already strained liquidity profile and the coronavirus's effect on top-line growth, although it was expected to climb out of bankruptcy this month. 

Envision Healthcare, a physician staffing and ambulatory surgery provider, completed a distressed debt exchange in May as the pandemic shut down elective patient volumes and further weakened liquidity. Specialty pharmaceutical manufacturers Mallinckrodt and Endo International, which face litigation risk and, in the case of Mallinckrodt, have revenue headwinds, also recently completed DDE transactions. Fitch classifies DDEs as restricted defaults that are tantamount to out-of-court settlements.
 

Twitter: @JELagasse
Email the writer: jeff.lagasse@himssmedia.com