AAC Holdings Inc. Downgraded To 'CCC' On Higher Risk Of A Debt Restructuring; Outlook Negative

  • AAC Holdings Inc. has taken out a $30 million term loan (2019 senior credit facility) maturing in one year on March 31, 2020, and amended terms on its existing credit facility (2017 senior credit facility), with significantly higher interest rates. The new 2019 senior credit facility is senior to the 2017 senior credit facility in the capital structure.
  • Despite the planned cost-saving initiatives and potential real estate sale leaseback transactions, we see escalated risk for a debt restructuring in the next 12 months when the term loan becomes due on March 31, 2020, given AAC's operational challenges and tight liquidity.
  • We lowered the issuer credit rating to 'CCC' from 'B-'. The outlook is negative.
  • We also lowered the issue-level rating on the 2017 senior credit facility to 'CCC' from 'B-'. The recovery rating is '3', indicating our expectation for meaningful (50%-70%; rounded estimate: 60%) recovery in the event of a payment default.
  • The negative outlook reflects the potential for a downgrade if the company restructures its debt or defaults over the next 12 months.
NEW YORK (S&P Global Ratings) March 15, 2019--S&P Global Ratings today took 
the rating actions listed above. The downgrade reflects escalated risk of a 
default and risk that AAC's liquidity will not be sufficient over the next 12 
months, primarily due to the $30 million term loan maturing in about one year. 
The $30 million new term loan provides temporary liquidity and covenant relief 
in the very near term; however, it carries a very high rate of interest 
(LIBOR+11%). In our opinion, AAC will have to monetize its real estate assets 
to repay this $30 million new term loan on March 31, 2020, and fund its 
operations in 2019. There is significant uncertainty about the timing and 
magnitude of sale-leaseback transactions. Given our expectation of cash flow 
deficits this year, we believe there are risks that proceeds from a potential 
sale leaseback may not be sufficient to cover operating needs and repay the 
term loan. In addition, the solvency of AAC also heavily depends on the 
execution of the cost-saving initiatives ($30 million annualized savings). We 
also believe it could take time to improve census, given the dual headwinds of 
the unfavorable Google search algorithm change as well as lower sales 
productivity with a recent change in its call center staff compensation 
structure.

The negative outlook reflects the potential for a downgrade if the company 
restructures its debt or defaults over the next 12 months.