AdaptHealth’s rating affirmed by Moody’s with positive outlook

Investing.com -- Moody’s Ratings has confirmed the Ba3 Corporate Family Rating (CFR) of AdaptHealth (NASDAQ:AHCO), LLC, while revising its outlook from stable to positive. The company’s Probability of Default Rating remains at Ba3-PD, and the senior unsecured note rating is still B1. AdaptHealth’s Speculative Grade Liquidity stays unchanged at SGL-1.

This affirmation of AdaptHealth’s ratings indicates Moody’s expectation that the company will continue its modest organic growth, particularly in the diabetes segment, following improved operating performance. AdaptHealth is anticipated to maintain strong liquidity to support its future growth prospects. The company’s growth strategy, which is reliant on acquisitions, is expected to be primarily funded with excess free cash flow. AdaptHealth boasts a solid history of successful acquisition integration and synergy realization.

The shift in outlook to positive is a reflection of the increasing potential for a ratings upgrade. This comes as AdaptHealth continues its transition towards a more conservative capital structure. Moody’s predicts that AdaptHealth will be able to de-lever to around 2.5x over the next 12 to 18 months. This is due to anticipated growth from improved operating performance and changes in product mix following the divestitures of some of its less profitable businesses. In addition, it is expected that AdaptHealth will continue to enhance its free cash flow generation as interest expense has decreased after the company’s recent debt repayment of around $170 million on the term loan.

AdaptHealth’s Ba3 CFR reflects the company’s significant scale in the provision of home healthcare equipment and related supplies in the United States, with sales of around $3.3 billion (FYE 2024). The company’s focus on a broad range of patient needs, including sleep, home medical equipment, diabetes, and respiratory products, contributes to its success. These products, the majority of which are related to chronic medical conditions, generate high levels of recurring revenues.

The company’s rating is constrained by its moderate leverage of around 3.2x. However, the debt/EBITDA is expected to decline to around 2.5x over the next 12-18 months. The rate of deleveraging will depend on the company’s appetite for future acquisitions and the ramp of the sleep business as supply chain disruptions are resolved.

AdaptHealth’s SGL-1 Speculative Grade Liquidity rating reflects its very good liquidity profile. As of December 31, 2024, the company’s cash levels stood at approximately $110 million, and it is anticipated to generate around $200 million of free cash flow in 2025. The company has a $300 million revolving credit facility extended through September 2029, with $22.4 million of LOCs outstanding as of December 31, 2024.

AdaptHealth’s unsecured notes are rated B1, one notch below the Ba3 CFR. This rating reflects their structural subordination to the secured debt in the company’s capital structure, including the $300 million (unrated/undrawn) revolving credit facility and a $650 million (unrated) term loan. Both the revolver and the term loan mature in September 2029.

Environmental, social, and governance (ESG) considerations have a moderately negative impact on AdaptHealth’s rating. The company’s environmental risk exposures reflect its role as a distributor using a fossil fuel-dependent truck fleet. This leads to exposure to carbon transition risk related to the carbon footprint of its truck fleet. The company’s social risk exposures include risk related to demographic and societal trends as about one third of the company’s revenue is derived from Medicaid and Medicare programs. This results in exposure to federal and state regulations related to the reimbursement of its products and services.

Ratings could be upgraded if the company sustains debt/EBITDA below 3.0x while maintaining a good liquidity profile. Further diversification by payor, product and geography, and increased scale, would also be positive credit factors that could support an upgrade. Conversely, ratings could be downgraded if the company’s financial policies become more aggressive or if the company sustains debt/EBITDA above 4.0x, or if liquidity erodes or the company’s free cash flow generation weakens.

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