Midwest Physician Admin Svcs, LLC -- Moody's affirms Midwest Physician Admin Svcs' B2 CFR; outlook stable

Rating Action: Moody's affirms Midwest Physician Admin Svcs' B2 CFR; outlook stableGlobal Credit Research - 24 Feb 2021New York, February 24, 2021 -- Moody's Investors Service ("Moody's") affirmed Midwest Physician Admin Svcs, LLC's (a core operating company of DuPage Medical Group Ltd. referred to herein as "DuPage") Corporate Family Rating at B2 and Probability of Default Rating at B2-PD. At the same time, Moody's assigned a B2 to the proposed Senior Secured 1st Lien credit facilities. The outlook remains stable.The actions follow DuPage's announced refinancing of its existing capital structure. Proceeds from the new debt will be used to repay its existing term loans in full and fund a $209 million distribution to shareholders. The ratings on the existing first lien credit facilities and second lien term loan will be withdrawn upon close.The affirmation of the B2 CFR reflects Moody's expectation that DuPage's debt/EBITDA will decline to about 5.7x by the end of 2022 as DuPage passes the anniversary of 2Q 20, which was most impacted by the coronavirus pandemic. Moody's estimates debt/EBITDA of around 6.6x at FYE 2020 pro forma for the proposed transaction.Moody's expects the company to realize mid-single digit revenue growth and benefit from increasing average revenue per physician as new physicians are on-boarded and their productivity improves. This will be partially offset by higher employee compensation costs. Credit metrics will also be aided by additional earnings generated by DuPage's new surgery center, which is on track to be completed in 2021. The surgery center should serve as a feeder to DuPage's physician practices.Moody's views the shareholder distribution as a credit negative as it points to the aggressive nature of DuPage's financial policies, a key governance issue. DuPage will be meaningfully reducing its cash balance to fund the dividend. Combined with higher gross financial leverage, this will leave DuPage more weakly positioned to absorb any unexpected operating setback or incremental debt. Additionally, Moody's believes DuPage's aggressive policies pose social risks as key customer relations stakeholders include patients, payors and government entities.The assignment of the B2 rating to the new 1st lien credit facilities reflects the fact that all the debt in the capital structure will be pari passu, and is rated B2, the same as the Corporate Family Rating.Assignments:..Issuer: Midwest Physician Admin Svcs, LLC....Senior Secured 1st Lien Term Loan, Assigned B2 (LGD3)....Senior Secured 1st Lien Revolving Credit Facility, Assigned B2 (LGD3)Affirmations:..Issuer: Midwest Physician Admin Svcs, LLC.... Probability of Default Rating, Affirmed B2-PD.... Corporate Family Rating, Affirmed B2Outlook Actions:..Issuer: Midwest Physician Admin Svcs, LLC....Outlook, Remains StableRATINGS RATIONALEDuPage's B2 CFR reflects Moody's expectations that the company's leverage will remain high, increasing to around 6.6x at FYE 2020 pro forma for the proposed dividend. Leverage should improve to 5.7x by the end of 2022 as DuPage passes the anniversary of 2Q 20, which was most impacted by the coronavirus pandemic. The ratings also reflect the risks associated with the company's high degree of geographic concentration given operations are primarily located in the greater Chicago, IL area. The credit profile benefits from the company's multi-specialty business model which provides patients with a broad range of primary and specialist care in an integrated setting. The company has meaningful scale in its markets and has successfully executed an organic and acquisition-led growth strategy.Moody's anticipates that DuPage will maintain good liquidity over the next 12-18 months. The company's liquidity is supported by cash and equivalents of $25 million pro forma for the transaction, down from about $200 million at FYE 2020, and Moody's expectation of positive cash flow from operations. Moody's expects DuPage will repay about $20 million in 2021 and 2022 related to the Medicare Advance payments, but will not need to repay the HHS grants, and that internal liquidity will be sufficient to make these payments. The proposed $100 million revolving credit facility is expected to remain undrawn and will contain a maximum 7.2 times first lien net leverage ratio covenant that is tested when borrowing exceeds 30% of the commitment. While Moody's does not expect the covenant to be tested over the next 12-18 months, Moody's believes the company will have adequate headroom, if tested.The outlook is stable, reflecting Moody's expectation of declining financial leverage due to earnings growth. Moody's believes that DuPage will continue to pursue acquisitions, but that these will be funded largely with internal source of liquidity.FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGSThe ratings could be upgraded if the company substantially broadens its geographic presence, exhibits less aggressive financial policies, sustained improvement in free cash flow, and if adjusted debt/EBITDA is sustained below 5.0x.The ratings could be downgraded if financial policies become more aggressive, including pursuing another shareholder dividend or a large debt funded acquisition. The ratings could be downgraded if any unexpected operating setback materially weakens DuPage's earnings or liquidity. Quantitatively, ratings could be downgraded if adjusted debt/EBITDA is sustained above 6.0 times.The proposed first lien term loans are expected to have no financial maintenance covenants. The proposed revolving credit facility will contain a springing maximum first lien net leverage ratio that will be tested, beginning with the second full fiscal quarter after closing, when the revolver is more than 30% drawn. If tested, the covenant will require first lien net leverage to be below 7.2 times. In addition, the first lien credit facility contains incremental facility capacity up to the greater of $129 million and 100% LTM EBITDA, plus unused general debt basket amounts, plus unlimited additional amounts up to 5.0x first lien net leverage ratio (if pari passu secured), up to 5.25x secured net leverage ratio (if junior secured), and either up to 5.50x total net leverage ratio or so long as the interest coverage ratio is less than 2.0x. Alternatively, the ratio tests may be satisfied so long as ratios are no worse on a pro forma basis. Amounts up to the greater of $64.5m and 50% of LTM EBITDA can be incurred with an earlier maturity date than the first lien term loan maturity date. Asset transfers to unrestricted subsidiaries are permitted subject to carve-outs; there are no "blocker" provisions contemplated. Only wholly owned subsidiaries must provide guarantees, raising the risk that guarantees may be released following a partial change in ownership. There are step-downs in the asset sale prepayment requirement to 50% and 0% upon achieving first lien net leverage ratios 0.50 times and 1.00 times inside the closing date first lien net leverage, respectively.DuPage is a large, independent multi-specialty physician group with over 775 physicians based in 120 locations in/near the greater Chicago, IL area. The company handles over 2 million patient encounters annually. The company generates around $1.1 billion of revenue. The company is owned by affiliates of Ares Management L.P., management and physicians of the company.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. 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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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