Epic/Freedom LLC Assigned #B# Corp. Credit Rating, Stable Epic Health Services Inc. Rating Withdrawn

Stocks and Financial Services Press Releases Wednesday January 27, 2016 09:23
NEW YORK--27 Jan--Standard & Poor's

NEW YORK (Standard & Poor's) Jan. 26, 2016--Standard & Poor's Ratings Servicestoday assigned its 'B' corporate credit rating to Epic/Freedom LLC. Theoutlook is stable. Concurrently, we withdrew the 'B' corporate credit ratingon Epic Health Services Inc. Epic/Freedom LLC is the parent entity whichissues the financial statements.

At the same time, we affirmed our 'B' rating on the $25 million revolvingcredit facility and $242.2 million (outstanding) first-lien term loan. Thedebt is issued by Epic Health Services along with some other co-borrowers. Therecovery rating on this debt is '3', indicating our expectations of meaningfulrecovery (50% to 70%) of principal in the event of a default.

We also affirmed our 'CCC+' rating on the $55.5 million second-lien term loan.The recovery rating remains '6', indicating our expectations of negligiblerecovery (0% to 10%) in the event of default. The debt is issued by EpicHealth Services along with some other co-borrowers.

"The ratings on Epic/Freedom reflect our assessment of a weak business riskprofile and debt leverage that we expect to remain between 4x and 5x,commensurate with an assessment of an aggressive financial risk profile," saidStandard & Poor's credit analyst David Kaplan.

The company's business risk is characterized by its narrow focus in the nichepediatric home health market, the highly fragmented nature of the home-healthindustry, vulnerability to Medicaid cuts through significant exposure toMedicaid reimbursement in a few states, and the company's small scale. Thesefactors are only partially offset by the company's leading position in Texasand its number two market position in the pediatric home health market in bothPennsylvania and New Jersey.

Our stable outlook anticipates relatively stable reimbursement environmentover the next few years, double-digit revenue growth from acquisitions in2016, followed by subsequent periods of low-single-digit organic growth, andour expectation that the company will maintain adjusted debt leverage between4x to 5x.

We could lower the rating if we anticipate that a material cut to Medicaidreimbursement will result in a meaningful contraction of EBITDA, resulting innegligible cash flow generation. Such a scenario would involve a decline inEBITDA margins of about 400 basis points.

An upgrade could occur if the company is able to expand its business size anddiversify geographically, which in turn, would alleviate its current payorconcentration. This could occur if the company makes successful tuck-inacquisitions while maintaining leverage below 5x and expanding EBITDA marginsover time to support ample free cash flow.


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