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S&P downgrades AAC Holdings' issuer credit rating over default risk

S&P Global Ratings lowered AAC Holdings Inc.'s issuer credit rating to CCC from B- after the company took out a $30 million term loan for additional liquidity.

The outlook is negative for AAC, which provides substance use treatment services for people with drug and alcohol addiction, and co-occurring mental and behavioral issues in the U.S.

S&P Global Ratings said the downgrade reflects an increased risk of default and risk that AAC's liquidity will not be sufficient over the next 12 months as the loan matures in about one year.

The rating agency expects AAC to monetize its real estate assets to repay the new term loan March 31, 2020, and fund its operations in 2019. It believes there are risks that proceeds from a potential sale-leaseback may not be sufficient to cover operating needs and repay the term loan.

S&P Global Ratings noted that AAC's solvency heavily depended on executing its cost-saving initiatives. The Brentwood, Tenn.-based healthcare facilities provider implemented a cost-reduction plan in December 2018 to improve liquidity and reduce operating expenses.

The company said in its fourth-quarter earnings report that it has continued its expense savings initiatives into 2019, which combined with cost savings plan announced in 2018, will save about $30 million for the company.

According to the rating agency, AAC faces significant operational uncertainties as the company works to improve its census. Another main constraint for AAC was weak free cash flow, which could be further impacted by litigation risk.

S&P Global Ratings said the negative outlook reflects the potential for a downgrade if the company restructures its debt or defaults over the next 12 months.

This S&P Global Market Intelligence news article may contain information about credit ratings issued by S&P Global Ratings. Descriptions in this news article were not prepared by S&P Global Ratings.