Surgery Partners Inc.

The stable outlook reflects our expectations for mid-single–digit percentage revenue growth supplemented by acquisitions and some margin improvement, leading to improving cash flow in 2019 and 2020 with deficits of $22 million and $19 million, respectively. That leads us to believe the capital structure is sustainable in the long term and that the company has the liquidity to support its current level of investment to drive improved cash flow. We could lower the rating if we believed free cash flow deficits will persist, which would lead us to question the sustainability of the capital structure. This scenario would entail little to no organic revenue growth and margin expansion. We could raise the rating if we believed Surgery Partners will generate

...The company is likely to remain highly leveraged at over 10x. S&P Global Ratings expects leverage of 12.3x in 2019 and 11.6x in 2020, with only limited deleveraging because we expect Surgery Partners Inc. will require additional debt to help finance its de novo investments and acquisitions. The company has also issued preferred stock that we classify as debt. The preferred stock accrues in-kind dividends, less any cash dividends paid, thereby increasing the amount of preferred stock annually. Excluding the preferred equity, we expect the company's leverage to be 12x in 2019 and 11x in 2020. However, we believe the company has the ability to modestly deleverage through EBITDA expansion. Continued cash flow deficit. We expect discretionary cash deficits, after capital expenditures and distributions to noncontrolling interests, of about $22 million in 2019 and $19 million in 2020. Cash flow in 2019 was burdened by an addition capital expenditure of $30 million in 2019 because of the opening...

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