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Affordable Care Holding Corp. -- Moody's changes Affordable Care's outlook to positive, affirms Caa1 CFR

·15 min read

Rating Action: Moody's changes Affordable Care's outlook to positive, affirms Caa1 CFRGlobal Credit Research - 18 Mar 2021New York, March 18, 2021 -- Moody's Investors Service, ("Moody's") affirmed the ratings of Affordable Care Holding Corp. ("ACH") including the Corporate Family Rating at Caa1, the Probability of Default Rating at Caa1-PD, and the first lien senior secured bank credit facilities at B3.The outlook was revised to positive.The change in outlook to positive reflects that ACH addressed its near-term maturity by extending $40 million of its $50 million revolver by one year through October 2022. In addition, the outlook change reflects the return to volumes to near pre-coronavirus pandemic levels. This supports Moody's expectation that leverage will decline to under 7.0 times by the end of fiscal 2021 as procedure volumes continue to recover and the company continues to benefit from the mix shift to dental implants which are a higher margin product than traditional dentures.The affirmation reflects Moody's expectation that the company's operations will improve, but ACH still faces significant refinancing needs as all of its first lien credit facilities mature in the fourth quarter of 2022. As a result, the company will need to make progress refinancing substantially all debt in the next 12 to 18 months.Moody's took the following rating actions:Issuer: Affordable Care Holding Corp.Corporate Family Rating, affirmed at Caa1Probability of Default Rating affirmed at Caa1-PDFirst Lien Senior Secured Term Loan, affirmed at B3 (LGD3)Senior Secured Revolving Credit Facility, affirmed at B3 (LGD3)Outlook Actions:Issuer: Affordable Care Holding Corp.Outlook, Changed to Positive from StableRATINGS RATIONALEACH's Caa1 Corporate Family Rating reflects its high financial leverage at around 7.7x pro forma LTM September 30, 2020 and a short-term debt maturity profile as all of its first lien credit facilities come due in the fourth quarter of 2022. ACH has limited revenue diversification with roughly 75% of revenue derived from denture services. 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. 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. The revolver is currently undrawn and is not expected to be drawn in the next 12 months, but will decrease to $40 million in October of 2021. Liquidity is further supported as Moody's anticipates that ACH will generate about $20 million in free cash flow in 2021.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 RATINGSMoody's could upgrade ACH if it makes progress addressing its debt maturities, while leverage is sustained below 7.5x, free cash flow remains positive, 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 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. services organization (DSO) which provides dental 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 351 dental offices across 41 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.REGULATORY DISCLOSURESFor 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.For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1243406.The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating. Jaime Johnson Vice President - Senior Analyst Corporate Finance Group Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. 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