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MedAssets Software Inter Hldg, Inc. -- Moody's assigns MedAssets B3 CFR, B2 first-lien ratings; outlook stable

·18 min read

Rating Action: Moody's assigns MedAssets B3 CFR, B2 first-lien ratings; outlook stable

Global Credit Research - 08 Jan 2021

$515 million of newly debt rated

New York, January 08, 2021 -- Moody's Investors Service, ("Moody's") assigned first time ratings to MedAssets Software Intermediate Holdings, Inc. ("MedAssets"), including a B3 corporate family rating and B3-PD probability of default rating, and B2 instrument ratings on both a new, $75 million first-lien revolving credit facility and a new, $440 million first lien term loan. The outlook is stable.

Proceeds from the proposed first-lien term loan, a new, $160 million second-lien term loan (unrated), plus $554 million of new preferred and common stock will be used by an affiliate of private equity firm Clearlake Capital Group, L.P. ("Clearlake") to acquire nThrive, Inc.'s technology solutions group segment.

..Issuer: MedAssets Software Intermediate Holdings, Inc.

.... Corporate family rating, Assigned B3

.... Probability of default rating, Assigned B3-PD

.... Senior secured first-lien bank credit facilities, maturing 2026 and 2028, Assigned B2 (LGD3)

.... Outlook, assigned Stable

RATINGS RATIONALE

The B3 CFR reflects MedAssets' small scale, very high Moody's-adjusted opening pro-forma debt-to-EBITDA leverage of roughly 9.4 times, and the operational risks associated with carving out the technology solutions group business of nThrive, Inc. into a standalone entity. Additionally, the company's rating is constrained by its high annual product development expenses (inclusive of capitalized software development expenses), which impede its ability to meaningfully reduce debt-to-EBITDA leverage over the next 12 months. MedAssets' credit profile benefits from a highly recurring revenue profile, its use of fixed-fee subscriptions to reduce revenue volatility relative to revenue cycle management ("RCM") peers, and Moody's expectation for free cash flow generation to improve over the next 12-18 months as cash carve-out expenses roll off and product development expenses are rationalized.

The company's high debt-to-EBITDA leverage pressures the ratings, but Moody's expects the measure to decline to approximately 7.75 times by mid-2022, a level which Moody's considers to be high for both its cash flow profile and relative to the broader B3 rating category. Moody's believes that RCM software providers must maintain adequate levels of product development spending to remain competitive, and takes a less optimistic view of the efficacy and sustainability of improving EBITDA by reducing product development spend to below-historic levels. The operational risks associated with the carve-out will be high in the months following the transaction and MedAssets' standalone operating cost structure (excluding product development) will be lean and somewhat sensitive to restructuring initiatives. The heightened event risk of the carve-out and limited financial flexibility underscore the importance of deleveraging for maintaining the rating.

Moody's views MedAssets ability to cover annual interest expense and overall cash flow relative to its debt balance as favorable to the broad B3 rating category, and projects (EBITDA minus capex)-to-interest and FCF-to-debt will approach 1.9 times and 2.9%, respectively, by the end of 2021. This credit strength is bolstered by its stable revenue base, with roughly 92% of annual revenue considered recurring in nature. The adequate cushion in its ability to service interest expense, coupled with its stable, high-visibility revenue stream allows Moody's to tolerate a debt-to-EBITDA ratio that is high for the broad B3 rating category.

Healthcare industry trends support the rating and help Moody's to look beyond the drawbacks of MedAssets' small scale, high closing leverage, and the lesser quality of earnings implied by carve-out historical financial statements. These supporting trends include increased healthcare spending, greater, regulatory-driven complexity, margin pressures caused by the transition to value-based care, and the need for an enterprise-wide solution to support the complexity of RCM as hospitals consolidate.

Moody's views MedAssets' liquidity as good, as demonstrated by a small initial cash balance that will be supplemented by free cash flows that, as a percentage of debt, are expected to approach the mid-single-digit percentages over the next 12 to 18 months, good for the ratings category. Moody's assumes MedAssets will reduce capitalized software expenditures substantially, from $30 million in 2019 to below $10 million by 2022. An ample, $75 million revolving credit facility, undrawn at closing, supports possible weakness in cash flows, but may also hint at the company's appetite for acquisitions. The transaction's loose covenant package, including a 7.8 times net first-lien-leverage limit, with no stepdowns, applicable when the revolver is 35% drawn, and no covenants associated with the term loans, suggests the company will have unimpeded access to the liquidity facility.

MedAssets' corporate governance policy presents risks through both the high financial leverage employed and private equity ownership, which typically places shareholder interests above those of creditors. Moody's expects aggressive financial policies will sustain high levels of leverage, including debt-funded M&A transactions and other shareholder-friendly policies. The burden of servicing the high debt load may restrict MedAssets' ability to continue investing in products and platform modernization that might otherwise help the company be competitive.

As proposed, the new credit facility is expected to provide covenant flexibility that if utilized could negatively impact creditors, including: i) an incremental first-lien facility capacity not to exceed (x) the greater of $92 million and 100% of adjusted EBITDA, less any such amounts incurred as incremental second-lien debt, plus (y) an amount such that first-lien leverage does not exceed 4.75 times (for pari passu debt), or either an amount such that the senior secured leverage ratio does not exceed 6.5 times or the interest coverage ratio is not less than 2.0x (for secured debt junior to the first lien), or 7.0 times total leverage (for debt secured by non-collateral, or unsecured); alternatively, all of the above ratios may be satisfied so long as leverage (coverage) does not increase (decrease) if incurred in connection with a permitted acquisition or investment; an amount up to the greater of $92 million and 100% of adjusted EBITDA may be incurred with an earlier maturity date than the existing debt; ii) the ability to transfer assets to unrestricted subsidiaries, to the extent permitted under the investment baskets, with no additional "blocker" provisions restricting such transfers; and iii) requirement that only wholly-owned domestic restricted subsidiaries act as subsidiary guarantors, raising the risk that guarantees may be released following a partial change in ownership. The credit agreement requires 100% of net cash proceeds to be used to repay the credit facility, if not reinvested within 18 months (subject to extension to 24 months), with 50%, 25%, and 0% stepdowns on the repayment requirement if first lien leverage is no more than 3.75 times, 3.50 times, and 3.25 times, respectively.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

The ratings could be upgraded if Moody's-adjusted debt-to-EBITDA approaches 6.5 times with free cash flow generation, as measured on a percentage of debt basis, sustained above 5.0%.

A ratings downgrade could result if Moody's expects free cash flow to approach breakeven, debt-to-EBITDA is not sustained below 8 times, or if organic revenue growth is negative. Undertaking a more aggressive financial policy, through debt-funded acquisitions or other steps, could pressure the ratings.

Headquartered in Alpharetta, GA, MedAssets Software Intermediate Holdings, Inc. provides healthcare revenue cycle management software-as-a-service solutions, including patient access, charge integrity, claims management, contract management, analytics and education. Moody's expects the company to generate 2021 revenue of roughly $230 million, a 2.5% increase relative to expected 2020 full-year revenue. MedAssets is slated to be bought out of nThrive, Inc. by private equity firm Clearlake Capital Group in an LBO expected to close in the first quarter of 2021.

The principal methodology used in these ratings was Software Industry published in August 2018 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1130740. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

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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At least one ESG consideration was material to the credit rating action(s) announced and described above.

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.

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Ignacio Rasero 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 Karen Nickerson 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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