Encompass Health Corp. — Moody’s reviews Encompass Health’s ratings for downgrade
Rating Action: Moody’s reviews Encompass Health’s ratings for downgradeGlobal Credit Research – 04 Feb 2022New York, February 04, 2022 — Moody’s Investors Service (Moody’s) placed the ratings of Encompass Health Corp. (“Encompass”), under review for downgrade including the Ba3 Corporate Family Rating (CFR) and Ba3-PD Probability of Default Rating. The rating agency also placed under review for downgrade the Baa3 ratings of Encompass’ senior secured revolving credit facility and term loan, and the B1 ratings of the unsecured notes. There is no change to the SGL-1 Speculative Grade Liquidity Rating. The outlook is changed to ratings under review from stable.The rating action follows the announcement on February 2, 2022 that Encompass will spin-off its home health and hospice divisions, which collectively represent about 22% of Encompass’ total revenue.The ratings review will focus on the credit impact from the separation of the home health and hospice businesses from Encompass’ core inpatient rehabilitation facilities (IRF) business. Encompass plans to complete the spinoff in the first half of 2022. The review will contemplate the additional costs to run the independent businesses, the new capital structure and the fact that Encompass will be less diversified and reduce its scale after the spin-off. The review will also consider Encompass’ enhanced management focus on the individual business lines, better aligned incentives, and relatively resilient volume trends despite the COVID-19 pandemic.Governance risk considerations are material to the rating action. Moody’s believes that while Encompass Health has considerable scale in the inpatient rehabilitation sector and good geographic diversification, the sale of the home health and hospice businesses will reduce the company’s overall scale and service offerings as well as potentially increase leverage.Ratings placed under Review for Downgrade:..Issuer: Encompass Health Corp….. Corporate Family Rating, Placed on Review for Downgrade, currently Ba3…. Probability of Default Rating, Placed on Review for Downgrade, currently Ba3-PD….Senior Secured Revolving Credit Facility, Placed on Review for Downgrade, currently Baa3 (LDG1)….Senior Secured Term Loan, Placed on Review for Downgrade, currently Baa3 (LGD1)….Senior Unsecured Regular Bond/Debenture, Placed on Review for Downgrade, currently B1 (LDG4)Outlook Actions:..Issuer: Encompass Health Corp…..Outlook, Changed To Rating Under Review From StableRATINGS RATIONALE/ FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGSNotwithstanding the rating review, Encompass Health’s Ba3 Corporate Family Rating reflects the company’s high exposure to Medicare reimbursement and the potential for adverse changes to Medicare rates for the company’s services. Moody’s believes that reimbursement for post-acute services could evolve in a way that would pressure Encompass’ margins. That said, Encompass has been making significant investments in IT and data analytics that Moody’s believes will help it gain operating and cost efficiencies. This will better position Encompass to absorb potential pressures associated with an evolving post-acute reimbursement landscape. The Ba3 CFR also reflects the company’s considerable scale in the inpatient rehabilitation (IRF) sector and good geographic diversification.ESG risks are material to Encompass Health’s ratings. As a for-profit hospital operator, Encompass faces social risk but less so than operators in the general acute care space. The affordability of hospitals and the practice of balance billing has garnered substantial social and political attention. However, this is less of an issue in the IRF space because patient stays in these facilities are never a “surprise”. While the vast majority of patients in IRFs are recovering from severe medical conditions, such as strokes (as opposed to elective surgeries), the lower acute care hospital volumes since the onset of the COVID-19 pandemic have somewhat constrained volumes at Encompass’ IRFs. Hospitals are now required to publicly provide greater price transparency into the prices of their services, although compliance and practice is inconsistent across the industry. Additionally, hospitals rely on Medicare and Medicaid for a substantial portion of reimbursement. Any changes to reimbursement to Medicare or Medicaid directly impacts hospital revenue and profitability. Longer-term, the potential for a single payor system (i.e. Medicare For All), the unification of post-acute reimbursement methodologies, or both would drastically change the operating environment.From a governance perspective, the company operates with moderate financial policies, particularly relative to its rated hospital peers. In 2020, the company returned the $238 million of grant relief it received from the CARES Act given uncertainty it had relating to the payment methodologies used by CMS and the attestations required. Encompass also did not utilize the accelerated Medicare payments that the CARES Act made available to hospitals and other healthcare providers.There is no change to the company’s SGL-1 Speculative Grade Liquidity Rating reflecting the company’s very good liquidity, supported by stable, strong free cash flow and significant availability under its revolver.Moody’s rating review will focus on the credit impact from the separation of the home health and hospice businesses from Encompass’ core inpatient rehabilitation facilities (IRF) business. The review will also contemplate the additional costs to run the independent businesses, the new capital structure and the fact that Encompass will be less diversified and reduce its scale after the spin-off. The review will also consider Encompass’ enhanced management focus on the individual business lines, better aligned incentives, and relatively resilient volume trends despite the COVID-19 pandemic.Headquartered in Birmingham, Alabama, Encompass Health Corporation is the largest operator of inpatient rehabilitation facilities including 145 hospitals, 251 home health locations and 96 hospice locations in 42 states and Puerto Rico. Encompass also provides home health and hospice services. Revenues are approximately $5.1 billion as of FYE December 31, 2021.The principal methodology used in these ratings was Business and Consumer Services published in November 2021 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1287897. 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Further information on the EU endorsement status and on the Moody’s office that issued the credit rating is available on www.moodys.com.The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody’s affiliates outside the UK and is endorsed by Moody’s Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody’s office that issued the credit rating is available on www.moodys.com.Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody’s legal entity that has issued the rating.Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating. Jaime Johnson Vice President – Senior Analyst Corporate Finance Group Moody’s Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. 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