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
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.
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.
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.
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.
Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.
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
© 2021 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.
CREDIT RATINGS ISSUED BY MOODY'S CREDIT RATINGS AFFILIATES ARE THEIR CURRENT OPINIONS OF THE RELATIVE FUTURE CREDIT RISK OF ENTITIES, CREDIT COMMITMENTS, OR DEBT OR DEBT-LIKE SECURITIES, AND MATERIALS, PRODUCTS, SERVICES AND INFORMATION PUBLISHED BY MOODY’S (COLLECTIVELY, “PUBLICATIONS”) MAY INCLUDE SUCH CURRENT OPINIONS. MOODY’S DEFINES CREDIT RISK AS THE RISK THAT AN ENTITY MAY NOT MEET ITS CONTRACTUAL FINANCIAL OBLIGATIONS AS THEY COME DUE AND ANY ESTIMATED FINANCIAL LOSS IN THE EVENT OF DEFAULT OR IMPAIRMENT. SEE APPLICABLE MOODY’S RATING SYMBOLS AND DEFINITIONS PUBLICATION FOR INFORMATION ON THE TYPES OF CONTRACTUAL FINANCIAL OBLIGATIONS ADDRESSED BY MOODY’S CREDIT RATINGS. CREDIT RATINGS DO NOT ADDRESS ANY OTHER RISK, INCLUDING BUT NOT LIMITED TO: LIQUIDITY RISK, MARKET VALUE RISK, OR PRICE VOLATILITY. CREDIT RATINGS, NON-CREDIT ASSESSMENTS (“ASSESSMENTS”), AND OTHER OPINIONS INCLUDED IN MOODY’S PUBLICATIONS ARE NOT STATEMENTS OF CURRENT OR HISTORICAL FACT. MOODY’S PUBLICATIONS MAY ALSO INCLUDE QUANTITATIVE MODEL-BASED ESTIMATES OF CREDIT RISK AND RELATED OPINIONS OR COMMENTARY PUBLISHED BY MOODY’S ANALYTICS, INC. AND/OR ITS AFFILIATES. MOODY’S CREDIT RATINGS, ASSESSMENTS, OTHER OPINIONS AND PUBLICATIONS DO NOT CONSTITUTE OR PROVIDE INVESTMENT OR FINANCIAL ADVICE, AND MOODY’S CREDIT RATINGS, ASSESSMENTS, OTHER OPINIONS AND PUBLICATIONS ARE NOT AND DO NOT PROVIDE RECOMMENDATIONS TO PURCHASE, SELL, OR HOLD PARTICULAR SECURITIES. MOODY’S CREDIT RATINGS, ASSESSMENTS, OTHER OPINIONS AND PUBLICATIONS DO NOT COMMENT ON THE SUITABILITY OF AN INVESTMENT FOR ANY PARTICULAR INVESTOR. MOODY’S ISSUES ITS CREDIT RATINGS, ASSESSMENTS AND OTHER OPINIONS AND PUBLISHES ITS PUBLICATIONS WITH THE EXPECTATION AND UNDERSTANDING THAT EACH INVESTOR WILL, WITH DUE CARE, MAKE ITS OWN STUDY AND EVALUATION OF EACH SECURITY THAT IS UNDER CONSIDERATION FOR PURCHASE, HOLDING, OR SALE.
MOODY’S CREDIT RATINGS, ASSESSMENTS, OTHER OPINIONS, AND PUBLICATIONS ARE NOT INTENDED FOR USE BY RETAIL INVESTORS AND IT WOULD BE RECKLESS AND INAPPROPRIATE FOR RETAIL INVESTORS TO USE MOODY’S CREDIT RATINGS, ASSESSMENTS, OTHER OPINIONS OR PUBLICATIONS WHEN MAKING AN INVESTMENT DECISION. IF IN DOUBT YOU SHOULD CONTACT YOUR FINANCIAL OR OTHER PROFESSIONAL ADVISER.
ALL INFORMATION CONTAINED HEREIN IS PROTECTED BY LAW, INCLUDING BUT NOT LIMITED TO, COPYRIGHT LAW, AND NONE OF SUCH INFORMATION MAY BE COPIED OR OTHERWISE REPRODUCED, REPACKAGED, FURTHER TRANSMITTED, TRANSFERRED, DISSEMINATED, REDISTRIBUTED OR RESOLD, OR STORED FOR SUBSEQUENT USE FOR ANY SUCH PURPOSE, IN WHOLE OR IN PART, IN ANY FORM OR MANNER OR BY ANY MEANS WHATSOEVER, BY ANY PERSON WITHOUT MOODY’S PRIOR WRITTEN CONSENT.
MOODY’S CREDIT RATINGS, ASSESSMENTS, OTHER OPINIONS AND PUBLICATIONS ARE NOT INTENDED FOR USE BY ANY PERSON AS A BENCHMARK AS THAT TERM IS DEFINED FOR REGULATORY PURPOSES AND MUST NOT BE USED IN ANY WAY THAT COULD RESULT IN THEM BEING CONSIDERED A BENCHMARK.
All information contained herein is obtained by MOODY’S from sources believed by it to be accurate and reliable. Because of the possibility of human or mechanical error as well as other factors, however, all information contained herein is provided “AS IS” without warranty of any kind. MOODY'S adopts all necessary measures so that the information it uses in assigning a credit rating is of sufficient quality and from sources MOODY'S considers to be reliable including, when appropriate, independent third-party sources. However, MOODY’S is not an auditor and cannot in every instance independently verify or validate information received in the rating process or in preparing its Publications.
To the extent permitted by law, MOODY’S and its directors, officers, employees, agents, representatives, licensors and suppliers disclaim liability to any person or entity for any indirect, special, consequential, or incidental losses or damages whatsoever arising from or in connection with the information contained herein or the use of or inability to use any such information, even if MOODY’S or any of its directors, officers, employees, agents, representatives, licensors or suppliers is advised in advance of the possibility of such losses or damages, including but not limited to: (a) any loss of present or prospective profits or (b) any loss or damage arising where the relevant financial instrument is not the subject of a particular credit rating assigned by MOODY’S.
To the extent permitted by law, MOODY’S and its directors, officers, employees, agents, representatives, licensors and suppliers disclaim liability for any direct or compensatory losses or damages caused to any person or entity, including but not limited to by any negligence (but excluding fraud, willful misconduct or any other type of liability that, for the avoidance of doubt, by law cannot be excluded) on the part of, or any contingency within or beyond the control of, MOODY’S or any of its directors, officers, employees, agents, representatives, licensors or suppliers, arising from or in connection with the information contained herein or the use of or inability to use any such information.
NO WARRANTY, EXPRESS OR IMPLIED, AS TO THE ACCURACY, TIMELINESS, COMPLETENESS, MERCHANTABILITY OR FITNESS FOR ANY PARTICULAR PURPOSE OF ANY CREDIT RATING, ASSESSMENT, OTHER OPINION OR INFORMATION IS GIVEN OR MADE BY MOODY’S IN ANY FORM OR MANNER WHATSOEVER.
Moody’s Investors Service, Inc., a wholly-owned credit rating agency subsidiary of Moody’s Corporation (“MCO”), hereby discloses that most issuers of debt securities (including corporate and municipal bonds, debentures, notes and commercial paper) and preferred stock rated by Moody’s Investors Service, Inc. have, prior to assignment of any credit rating, agreed to pay to Moody’s Investors Service, Inc. for credit ratings opinions and services rendered by it fees ranging from $1,000 to approximately $5,000,000. MCO and Moody’s Investors Service also maintain policies and procedures to address the independence of Moody’s Investors Service credit ratings and credit rating processes. Information regarding certain affiliations that may exist between directors of MCO and rated entities, and between entities who hold credit ratings from Moody’s Investors Service and have also publicly reported to the SEC an ownership interest in MCO of more than 5%, is posted annually at www.moodys.com under the heading “Investor Relations — Corporate Governance — Director and Shareholder Affiliation Policy.”
Additional terms for Australia only: Any publication into Australia of this document is pursuant to the Australian Financial Services License of MOODY’S affiliate, Moody’s Investors Service Pty Limited ABN 61 003 399 657AFSL 336969 and/or Moody’s Analytics Australia Pty Ltd ABN 94 105 136 972 AFSL 383569 (as applicable). This document is intended to be provided only to “wholesale clients” within the meaning of section 761G of the Corporations Act 2001. By continuing to access this document from within Australia, you represent to MOODY’S that you are, or are accessing the document as a representative of, a “wholesale client” and that neither you nor the entity you represent will directly or indirectly disseminate this document or its contents to “retail clients” within the meaning of section 761G of the Corporations Act 2001. MOODY’S credit rating is an opinion as to the creditworthiness of a debt obligation of the issuer, not on the equity securities of the issuer or any form of security that is available to retail investors.
Additional terms for Japan only: Moody's Japan K.K. (“MJKK”) is a wholly-owned credit rating agency subsidiary of Moody's Group Japan G.K., which is wholly-owned by Moody’s Overseas Holdings Inc., a wholly-owned subsidiary of MCO. Moody’s SF Japan K.K. (“MSFJ”) is a wholly-owned credit rating agency subsidiary of MJKK. MSFJ is not a Nationally Recognized Statistical Rating Organization (“NRSRO”). Therefore, credit ratings assigned by MSFJ are Non-NRSRO Credit Ratings. Non-NRSRO Credit Ratings are assigned by an entity that is not a NRSRO and, consequently, the rated obligation will not qualify for certain types of treatment under U.S. laws. MJKK and MSFJ are credit rating agencies registered with the Japan Financial Services Agency and their registration numbers are FSA Commissioner (Ratings) No. 2 and 3 respectively.
MJKK or MSFJ (as applicable) hereby disclose that most issuers of debt securities (including corporate and municipal bonds, debentures, notes and commercial paper) and preferred stock rated by MJKK or MSFJ (as applicable) have, prior to assignment of any credit rating, agreed to pay to MJKK or MSFJ (as applicable) for credit ratings opinions and services rendered by it fees ranging from JPY125,000 to approximately JPY550,000,000.
MJKK and MSFJ also maintain policies and procedures to address Japanese regulatory requirements.