Rating Action: Moody's upgrades Affordable Care's CFR to Caa1, outlook stable
Global Credit Research - 15 Jan 2021
New York, January 15, 2021 -- Moody's Investors Service, ("Moody's") upgraded the ratings of Affordable Care Holding Corp. ("ACH") including the Corporate Family Rating to Caa1 from Caa2, the Probability of Default Rating to Caa1-PD from Caa2-PD, and the first lien senior secured bank credit facilities to B3 from Caa1. The outlook remains stable
The upgrade reflects ACH's return of patient volumes to near pre-coronavirus levels and improved leverage to 7.7x for the twelve months ended September 30, 2020. At the same time, ACH has been able to improve its liquidity with about $79 million of cash and full access to its $50 million revolver at September 30, 2020. Liquidity improved as ACH's Affiliated Practices received CARES act funding and moderated its growth capital expenditures and managed variable costs in 2020. The company continues to benefit from the mix shift to more dental implants which are a higher margin product than traditional dentures.
The stable outlook reflects Moody's expectation that this level of leverage, along with the company's ability to reduce variable costs and growth capital expenditures if necessary, positions the company well to withstand the potential for further stress from the coronavirus pandemic and/or a weakening of the economy. Moody's expects ACH will generate positive free cash flow, though with some variability depending on working capital changes. That said, the stable outlook also reflects Moody's view that another nationwide mandate to defer dental services is unlikely. ACH's geographic diversity should limit the impact from coronavirus outbreaks in any particular region.
Issuer: Affordable Care Holding Corp.
Corporate Family Rating, upgraded to Caa1 from Caa2
Probability of Default Rating upgraded to Caa1-PD from Caa2-PD
First Lien Senior Secured Term Loan, upgraded to B3 (LGD3) from Caa1 (LGD3)
Senior Secured Revolving Credit Facility, upgraded to B3 (LGD3) from Caa1 (LGD3)
Issuer: Affordable Care Holding Corp.
Outlook, remains Stable
ACH's Caa1 Corporate Family Rating reflects its high financial leverage and a short-term debt maturity profile. ACH has limited revenue diversification with roughly 75% of revenue derived from denture services, which is mostly self-pay. While not subject to reimbursement risk, the company is reliant on continued availability of consumer financing to fund a meaningful portion of its sales, most of which is self-pay. The credit profile also reflects rising risk of a prolonged recession in the US could reduce demand for ACH's product. The rating is supported by ACH's strong market presence as the largest provider of dentures in the US, good geographic diversification across the U.S., and historically positive trends in same-store sales growth. The rating is further supported by favorable industry dynamics, with a growing market of edentulous patients, due to the aging population.
Moody's considers ACH to have adequate liquidity. The company has historically had negative free cash flow due to growth and acquisition spending, but ACH has conserved cash during the coronavirus pandemic. Liquidity is supported by the company's approximately $79 million of cash as of September 30, 2020, as well as another $50 million available on the revolver. ACH has refinancing risk as its revolver expires in October 2021 and its $530 million first lien term loans mature in October 2022. The revolver is currently undrawn and is not expected to be drawn in the next 12 months.
Moody's considers coronavirus to be a social risk given the risk to human health and safety. Aside from coronavirus, ACH faces other social risks such as the rising concerns around the access and affordability of healthcare services. While Moody's does not consider the affiliated dental practices to face the same level of social risk as many other healthcare providers, ACH in particular, generates a majority of revenues from fee-for-service, out-of-pocket payments paid directly by patients. Further, ACH had a cybersecurity incident in mid-2019. As a result, the incident has led the company to invest further into its cybersecurity systems and practices, which should allow it to protect itself from future cyber-attacks. From a governance perspective, Moody's views ACH's growth strategy to be aggressive given its history of debt-funded acquisitions and high leverage.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
Moody's could upgrade ACH if it addresses its near-term debt maturities, leverage is sustained below 7.5x, while sustaining positive free cash flow, and effective management of growth.
Moody's could downgrade ACH if operating performance or liquidity weakens, the company is unable to make progress addressing its near-term debt maturities, or the probability of a default including by way of a transaction that Moody's would deem a distressed exchange rises.
ACH is a U.S. dental services organization (DSO) which provides management and dental laboratory services to affiliated dental centers, primarily focused on dentures. Under management service agreements, ACH provides business support services necessary for the administration of the non-clinical aspects of the dental operations, while the affiliated practices, operated by dental practitioners, are responsible for providing dental care to patients. In addition to providing dental facilities (primarily leased from third parties), dental supplies and support staff to the affiliated practices, the company also provides business operations, financial, marketing, and other administrative services. ACH is affiliated with more than 352 dental offices across 40 U.S. states. The company is owned by Berkshire Partners LLC, and had $260 million of LTM September 30, 2020 net revenue. As a privately-owned company, ACH discloses limited information publicly.
The principal methodology used in these ratings was Business and Consumer Service Industry published in October 2016 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1037985. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.
For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.
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Jaime Johnson Vice President - Senior Analyst Corporate Finance Group Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 Jessica Gladstone, CFA Associate Managing Director Corporate Finance Group JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 Releasing Office: Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653
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