-- U.S.-based staffing provider AMN is replacing its existing facilities of $251.5 million with new facilities of $250 million, leaving total debt outstanding largely unchanged. -- We are affirming our 'B+' corporate credit rating on AMN.
-- We are also assigning a 'BB-' issue-level rating to the company's senior secured facility, with a recovery rating of '2'.
-- Our stable outlook reflects our expectation that credit measures could continue to range widely, reflecting the potential for cyclicality and exposure to U.S. economic conditions.
On March 20, 2012, Standard & Poor's Ratings Services affirmed its 'B+' corporate credit rating on AMN Healthcare Inc. The outlook is stable.
At the same time, we assigned a 'BB-' issue-level rating to the company's $200 million term loan B and $50 million revolver. The recovery rating on the new credit facility is a '2', indicating expectations for substantial (70%-90%) recovery of principal in the event of payment default.
The rating on AMN, a subsidiary of AMN Healthcare Services Inc., reflects a "weak" business risk profile (based on our criteria), highlighted by its operating concentration in the highly competitive and cyclical health care staffing industry. The "aggressive" financial risk profile (based on our criteria) reflects credit measures that can vary widely through a cycle.
While adjusted debt to EBITDA is 4x at Dec. 31, 2011, it had been as high as 5x pro forma the August 2010 Nursefinders acquisition. Our base-case scenario contemplates mid-single-digit revenue growth and marginal improvement in EBITDA margins in 2012, although we note that operations are subject to cyclicality and could differ meaningfully from that expectation. Still, in our base case, EBITDA growth and debt repayment could further reduce leverage comfortably below 4x by the end of 2012.
Our revenue growth expectations incorporate high-single-digit revenue growth in its nursing and allied health staffing business, benefiting from heightened demand for services and increased number of managed service provider (MSP) contracts due to a continuously improving economy. This growth incorporates a modest uptick in pricing. We expect revenue will modestly grow about 1% in its locum tenens and permanent physical staffing businesses, a modest turn-around from the 3% revenue decline in 2011. The decline in 2011 was caused by an unfavorable mix shift to lower billed services, a trend we believe will be rectified by new management as AMN attempts to increase their presence in other higher demand, higher billed services.
Despite AMN's position as a leading provider of nurse and allied health staffing (64% of its revenues), locum tenens, and permanent placement services (36%), the staffing industry faces competition and cyclicality in demand. Demand for temporary health care staffing was hurt in recent years as hospitals relied on overtime of existing staff and as temporary nurses converted their status to permanent placement. The locum tenens staffing industry, traditionally less cyclical than local temporary and travel nurse staffing, did not feel the effects as much because doctors generally propel hospital admissions, and the demand remains to cover physicians' scheduled paid time off.
The health care staffing industry is rebounding due to an improving economy and benefits over the long term from favorable trends that include a shortage of health care professionals, an aging population, and health care reform. We expect industry growth in 2012 to range between 8%-10% in temporary nurse, allied staffing, and the locum tenens business. However, we expect some peers in the locum tenens industry may not fully benefit from this growth, as the expected increase in fill orders may be offset by a lower billed revenue service mix. Additionally, the trend of physicians taking longer to retire remains a challenge to permanent physician staffing.
AMN's weak business risk profile reflects the company's concentration in the highly cyclical staffing industry. The company's revenues declined by more than 50% from peak levels in 2008 through the first quarter of 2010, primarily due to a decline in demand in its nurse and allied health segment. This revenue decline was partially offset by its high variable-cost structure, allowing EBITDA margins to decline only about 200 basis points (bps) just prior to the Nursefinders acquisition. The locum tenens staffing and permanent physician placement segments provide modest diversity and are incorporated into our assessment of business risk. The 2010 acquisition of Nursefinders has increased the company's revenue base by close to 30% and benefits its growth strategy as AMN grows its managed service provider contracts (MSPs). If the company increases its MSP contract revenue base over time, it could be favorable to the company's business risk. MSPs provide a more reliable revenue stream by filling most labor orders under contract (typically three years) with its own talent pool. We have also factored competition into AMN's weak business risk profile.
The aggressive financial risk profile is characterized by adjusted debt to EBITDA that has ranged from 5x to 4x and funds from operations (FFO) to debt between 15% to 20% over a year-and-a-half cycle. While we expect the company to de-lever through EBITDA growth and debt repayment, and expect leverage will be around 3.7x and FFO to debt around 20% by year-end 2012, the company's exposure to cyclicality could jeopardize our expectation. We expect the company to maintain a relatively conservative financial policy and do not expect it to be acquisitive in the near term as it focuses on expanding the operations acquired in the Nursefinders transaction.
AMN's liquidity is "adequate" (based on our criteria), with sources of cash likely to exceed uses substantially for the next 12 to 24 months. In accordance with key quantitative measures (see criteria articles below), relevant aspects of AMN's liquidity are as follows:
-- We expect coverage of uses to be in excess of 1.2x for the next two years. Sources include nominal cash reserves, expected cash flow generation of about $30 million, and about $36 million available on its $50 million revolver. Mandatory uses of $15 million include about $8 million of capital expenditures, around $2 million of annual debt amortization payments, and the remainder to fund working capital. We expect excess cash will be used to further reduce debt.
-- We expect that net sources would be positive, even with a 15% decline in EBITDA.
-- We expect cushions on bank-calculated debt covenants on its new facility to be in excess of 20%.
-- The company has a limited ability to absorb low-probability shocks, based on its size and cash generation.
For the complete recovery analysis, see Standard & Poor's recovery report on AMN, to be published shortly after this release, on RatingsDirect.
Our stable outlook reflects our expectation that credit measures could continue to range widely, reflecting the potential for cyclicality and exposure to U.S. economic conditions. The current rating and outlook could tolerate peak leverage of about 5x for a short duration.
An upgrade could occur if we are comfortable that adjusted leverage would approach 3x and that the cyclical range of leverage would peak at about 4x, rather than the previous peak of 5x. A downgrade could occur if margins decline by at least 200 bps, which would cause credit metrics to decline, and be more reflective of what we consider a "highly leveraged" financial risk profile. This could happen if demand for temporary labor declines and the company can't adjust its cost structure quickly. A downgrade could also occur if the company shifts its financial policy from debt repayment to an aggressive acquisitive strategy that relies on additional debt borrowings.