Azalea TopCo, Inc. -- Moody's affirms Azalea TopCo's B3 CFR; outlook stable

Rating Action: Moody's affirms Azalea TopCo's B3 CFR; outlook stableGlobal Credit Research - 10 Feb 2022New York, February 10, 2022 -- Moody's Investors Service ("Moody's") affirmed Azalea TopCo, Inc.'s (dba Press Ganey) B3 Corporate Family Rating (CFR) and B3-PD Probability of Default Rating. Concurrently, Moody's assigned a B2 rating to the company's proposed incremental $400 million senior secured first lien term loan and affirmed the B2 ratings on the company's existing $250 million revolver due 2024 and $1,186 million senior secured first lien term loan. The B2 rating on the first lien debt reflects their priority position relative to second-lien debt of $444 million (unrated) in the capital structure. The outlook is stable.Proceeds from the incremental debt issuance, combined with a sizeable equity commitment will be used to fund the acquisition of Forsta, a market research firm and pay related fees and expenses. The acquisition will contribute approximately $150 million of revenue to Press Ganey and expand the company's customer base and service capabilities. The ratings actions are based on expectations of the company's continued high financial leverage in the context of the rating category and integration risk from frequent acquisitions. These factors are mitigated by a solid fundamental business profile that benefits from exposure to a stable healthcare sector, strong margins and expected deleveraging in the absence of any additional debt. Governance was a consideration in the rating action, specifically the tolerance for high leverage that is used to fund growth.The following ratings/assessments are affected by today's action:New Assignments:..Issuer: Azalea TopCo, Inc.....Senior Secured 1st Lien Term Loan, Assigned B2 (LGD3)Ratings Affirmed:..Issuer: Azalea TopCo, Inc..... Corporate Family Rating, Affirmed B3.... Probability of Default Rating, Affirmed B3-PD....Senior Secured Bank Credit Facility, Affirmed B2 (LGD3) Outlook Actions: ..Issuer: Azalea TopCo, Inc. ....Outlook, Remains Stable RATINGS RATIONALE Press Ganey's B3 CFR is constrained by the company's high financial leverage, modest scale and risk associated with private equity ownership. The company's entrenched market position, extensive survey data and benchmarking capabilities support strong profitability margins. Moody's believes the company will continue to benefit from the increasing complexity of the healthcare system that requires data and information to drive allocation of resources. In addition, the government mandated patient experience surveys ensure demand for services that are provided by Press Ganey. Good operating track record, high client retention rate, diverse customer base and long-standing relationships with leading healthcare providers are other favorable rating considerations. The company, via its acquisitions, recently entered new markets such as the payor vertical and online information platforms for patients, which Moody's believes is necessary to maintain market presence in an increasingly crowded market. The rating also incorporates the company's exposure to legislative risk inherent in its relationship with the Centers for Medicare and Medicaid Services ("CMS").Pro forma leverage (Moody's adjusted debt/EBITDA) for the transaction is over 10.0x for LTM September 2021. Moody's expects leverage to moderate to 8.0x over the next 12-18 months driven by revenue growth and sustained strong margins. Revenue growth in the base business (excluding acquisitions) is expected to be in the low to mid-teen area. Over the course of the next 12-18 months revenue will be boosted as revenues from SPH Analytics, which was acquired in 2021 and Forsta are annualized. The company's ability to cross-sell the company's other high value products will drive earnings and above-average margin growth. However, Moody's anticipates Press Ganey will continue to augment growth with acquisitions, limiting the reduction in leverage on a sustainable basis.Press Ganey has good liquidity, supported by the company's free cash flow generation and availability under its $250 million revolving credit facility. Moody's expects the company to generate $27 million in free cash flow over this year, with FCF-to-debt of close to 1%. Cash flow this year includes some one-time expenses. Reliance on the revolving credit facility is expected to be limited to funding acquisitions. Alternate liquidity is limited as all assets are encumbered.The B2 ratings assigned to Press Ganey's incremental $400 million first lien senior secured term loan and existing approximately $1.2 billion first lien senior secured term loan due July 2026 are one notch above the company's B3 CFR, reflecting the priority position in the capital structure and the benefit from the loss absorption provided by the $444 million senior second lien term loan (unrated). The company has a $250 million senior secured first lien revolver that is rated B2 and is pari passu to the first lien term loan. The capital structure also includes $182 million of perpetual preferred equity.The stable outlook reflects Moody's expectations that the various players within healthcare sector will continue to demand and require patient experience measurement and related information and analytics. The stable outlook also assumes that there will not be any significant changes in law or regulation that would cause demand for services provided by Press Ganey to decline. Moody's expects that revenue will continue to grow organically and via acquisitions as the company adds revenue sources. Moody's expects leverage will moderate towards 8.0x by the end of 2022.FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGSMoody's would consider a ratings upgrade if (all metrics Moody's adjusted): i) Press Ganey continues to grow scale and revenue while maintaining strong margins; ii) Moody's expects debt-to-EBITDA will be sustained below 7.0x, iii) free cash flow as a percentage of debt will be sustained above 5%, and (iv) good liquidity is maintained.Moody's would consider a downgrade if (all metrics Moody's adjusted): i) revenue, client retention or liquidity materially deteriorate that would indicate declining market share or demand for services provided by the company, (ii) EBITA to interest is sustained below 1.0x and (iii) free cash flow to debt approaches break-even.The principal methodology used in these ratings was Business and Consumer Services published in November 2021 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1287897. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.Headquartered in Boston, Massachusetts and South Bend, Indiana, Azalea TopCo, Inc. (dba Press Ganey) is a leading provider of performance measurement and improvement services to U.S. healthcare providers including hospitals, medical practices and alternate-site providers. Press Ganey is owned by private equity sponsors Ares Management and Leonard Green & Partners. The company generated approximately $515 million revenue in LTM period ending September 2021.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. 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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 http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1288235.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. Farah Zakir 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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