Surgery Partners Inc.

In May 2021, the company converted preferred shares into common equity which lowered leverage as we previously accounted for preferred equity as debt. We expect discretionary cash deficits of about $80 million in 2021 and $15 million in 2022 after capital expenditures, distributions to non-controlling interests, and the repayment the Medicare advanced payments and deferred payroll taxes. The stable outlook reflects our expectations for mid-single–digit percentage organic revenue growth supplemented by new physician recruitment and acquisitions amid continued recovery from the COVID-19 pandemic. We could lower the rating if we believe that free cash flow deficits (after distribution to noncontrolling interests) would widen and persist, which would lead us to question the sustainability of the capital structure. This scenario would

...We expect the company to remain highly leveraged at around 9x. We expect leverage of 9.4x in 2021 and 9.0x in 2022, with only modest deleveraging because we expect the company may require additional debt to help finance its de novos investments and acquisitions. We believe the company can achieve a modest deleveraging through EBITDA expansion and use common equity to help fund some de novos or acquisitions. In May 2021, the company converted preferred shares into common equity which lowered leverage as we previously accounted for preferred equity as debt. The company's investment in new sites burdens cash and pressures margins. In addition to acquisitions supplementing organic growth, the company employs a de novo strategy to expand its operations and grow revenue. Opening new facilities, which the company has been doing every year, burdens cash flow, most notably because of working capital, as the new sites mature. Similarly, new sites pressure margins for the first six to nine months...

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