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S&P downgrades Surgery Partners on lower cash flow expectations

S&P Global Ratings downgraded Surgery Partners Inc.'s long-term issuer credit rating to B- from B with a stable outlook, reflecting expectations for lower cash flows in 2018 and 2019 after some operating underperformance and higher than expected expenses and distributions to noncontrolling interest holders.

The rating agency expects free cash flow deficits for 2018 and 2019 as well as very high adjusted leverage in 2018. It believes the underperformance was due to slightly lower-than-expected volume and higher selling, general and administrative expenses from acquisition integration and restructuring efforts.

S&P said Brentwood, Tenn.-based surgical facilities operator is working on improving its performance and expects results to improve in 2019 and 2020 from higher profitability, with revenue expected to improve slightly as physician recruitment efforts lead to higher facility utilization.

The agency also expects stable gross margins in 2019 after a decline in 2018 due to $760 million National Surgical Healthcare acquisition in 2017. S&P expects Surgery Partners to report a smaller cash flow deficit in 2019 and that the company will have flat to slightly positive free cash flow in 2020 or 2021.

S&P said its view of the business continues to reflect the company's narrow operating focus, strong competition in the industry and the ongoing pressure on reimbursements.

In the long term, the agency expects the company to benefit from favorable industry trend of payers and patients preferring outpatient treatment for special procedures due to lower costs and greater convenience.

The stable outlook takes into account the agency's expectations for low single-digit percentage revenue growth supplemented by acquisitions and some margin improvement. S&P said it believes that the capital structure is sustainable in the long term and that the company has the liquidity to weather this period of restructuring and investment.

This S&P Global Market Intelligence news article may contain information about credit ratings issued by S&P Global Ratings, a separately managed division of S&P Global Inc. Descriptions in this news article were not prepared by S&P Global Ratings. The original S&P Global Ratings documents referred to in this news brief can be found here.