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Rating Action: Moody's upgrades Tivity Health, Inc.'s CFR to B2; outlook is Stable
Global Credit Research - 27 Jan 2021
New York, January 27, 2021 -- Moody's Investors Service ("Moody's") today upgraded Tivity Heath, Inc's ("Tivity") Corporate Family Rating ("CFR") to B2 from B3 and its Probability of Default Rating to B2-PD from B3-PD. Concurrently, Moody's upgraded the company's senior secured credit facilities (revolver and term loans) to B2 from B3. Moody's also upgraded Tivity's Speculative Grade Liquidity Rating to SGL-1 from SGL-3. The rating outlook is stable.
The upgrade reflects materially improved credit metrics following the $519 million debt paydown after the close of the sale of its Nutrition business in December 2020. Pro forma for the debt reduction, Moody's adjusted debt-to-EBITDA improved to about 3.2x from 4.3x for the trailing twelve months ended September 30, 2020. Post the divestiture, Tivity will focus on its healthcare business. Lower leverage and a sizable $100 million cash balance provides financial flexibility to manage operating challenges in the SilverSneakers and Prime Fitness businesses due to reduced gym visitation and Moody's expectation that rates from healthcare providers will be pressured along with lower consumer utilization of the company's programs.
The healthcare business has been negatively impacted by the coronavirus pandemic since March 2020 as gym visitation by its members (mostly seniors above age 65) was reduced significantly. However, despite the challenge for its top line, given the nature of a portion of its contracts for the SilverSneakers program (paid as per member per month regardless of number of gym visits) as well as cost management initiatives, the company was able to show significant margin expansion with earnings for the Healthcare business remaining relatively flat in FY2020 vs FY2019 (per company's guidance). For FY2021, Moody's expects continued pressure for topline due to the ongoing coronavirus pandemic from continued depressed gym visitation through at least the first half of 2021. Moody's expects the recovery in visitation will pick up in the later part of 2021 once a higher share of the public has been vaccinated and the coronavirus pandemic subsides. Gym visitation by seniors is nevertheless likely to remain below pre-pandemic levels because of apprehension about being in social settings. Moody's expects the company will focus on expanding its digital offerings to keep its members engaged while at home.
Moody's expects cost management will continue to mitigate some of the negative impact from volume declines in 2021 and expects debt-to-EBITDA leverage will remain in the mid 3.0x for 2021 because of continued debt reduction.
The upgrade of the SGL rating to SGL-1 from SGL-3 reflects Moody's expectation for very good liquidity over the next year. The company has prepaid its mandatory amortization until March 2022 and bolstered the cash balance to approximately $100 million from the proceeds of the Nutrition divestiture, and the reduction in leverage improved cushion within the 5.75x net debt-to-EBITDA leverage covenant. The liquidity rating could decline when term loan amortization rolls into the forward 12-month window and due to step downs in the covenant to 5.25x in December 2020 and 4.75x in December 2021.
Moody's took the following rating actions:
Issuer: Tivity Health, Inc.
.Corporate Family Rating, upgraded to B2 from B3
.Probability of Default Rating, upgraded to B2-PD from B3-PD
.Gtd. senior secured facility (revolver, term loan A and term loan B), upgraded to B2 (LGD4) from B3 (LGD4)
.Speculative Grade Liquidity Rating, upgraded to SGL-1 from SGL-3
Issuer: Tivity Health, Inc.
.... Outlook, revised to Stable from negative
The B2 CFR reflects Tivity's modest debt-to-EBITDA leverage of about 3.2x pro forma for the divestiture of the nutrition business for the trailing twelve months ended September 30, 2020 and our expectation that leverage will be maintained in the mid 3.0x over the next year. The rating also reflects the company's modest scale, reduced business diversity and concentration in the Healthcare segment following the sale of Nutrisystem and South Beach Diet, as well as revenue concentration that the company's SilverSneaker program has to large health insurance companies which reimburse it for its services. The loss of one or more of these payors or reduction in rates would be a material headwind that would weaken revenue and earnings. New senior management is strategically focused on the healthcare business. Moody's nevertheless believes there is operating uncertainty given the reversal of business focus and the challenges to the SilverSneakers program from reduced utilization of the program and gyms as a result of the pandemic.
However, the rating is supported by Tivity's established market position in fitness and health improvement programs for seniors through its SilverSneakers brand. SilverSneakers is a leading fitness program specifically designed for older adults, offered through Medicare Advantage and Medicare Supplement plans. Hence, for the SilverSneakers program, Tivity is paid by health insurance companies that offer Medicare Advantage programs. Favorable demographic trends in the US reflect an increasing number of seniors turning 65 and signing up and tapping into Medicare Advantage programs. This will expand the company's addressable market as the pool of individuals eligible to participate in the SilverSneakers programs increases.
The coronavirus outbreak, the government measures put in place to contain it, and the weak global economic outlook continue to disrupt economies and credit markets across sectors and regions. Our analysis has considered the effect on the performance of Tivity from the current weak US economic activity and a gradual recovery for the coming months. Although an economic recovery is underway, it is tenuous and its continuation will be closely tied to containment of the virus. As a result, the degree of uncertainty around our forecasts is unusually high. We regard the coronavirus outbreak as a social risk under our ESG framework, given the substantial implications for public health and safety. Specifically, the weaknesses in Tivity's credit profile, including its exposure to continued social distancing measure in the US have left it vulnerable to shifts in market sentiment in these unprecedented operating conditions and the company remains vulnerable to the ongoing coronavirus pandemic and social distancing measures. Moody's expects the coronavirus concern will start to subside in the second half of 2021 once a growing share of the public has been vaccinated.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
The stable outlook reflects Moody's view that Tivity will be able to maintain its leverage in the mid 3.0x over the next 12 to 18 months despite the ongoing challenge to its operating performance as the result of continued disruptions from the Covid-19 pandemic. The stable outlook also reflects that the company will be able to maintain at least good liquidity.
The company will need to successfully address the operating challenges to be considered for an upgrade including retention of the membership base, restoring utilization levels at or close to pre-pandemic levels, and contract renewals with healthcare providers at rates that do not meaningfully reduce EBITDA. The company will also need to sustain Moody's adjusted debt-to-EBITDA below 3.0x along with very good liquidity including positive free cash flow that comfortably exceeds required term loan amortization to be considered for an upgrade.
The ratings could be downgraded if operating performance weakens from reductions in the membership base, low service utilization, a loss of a large customer, or rate pressure from payers. Debt-to-EBITDA leverage sustained above 4.0x or weakening liquidity could also prompt a downgrade.
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.
Based in Franklin, TN Tivity Health, Inc. is a provider of fitness and health improvement programs for mostly older adults in the US. Key brand is its SilverSneakers brand that provides fitness programs to older adults. Pro forma for the divestiture of its nutrition business in December 2020, we expect the publicly-traded company to generate approximately $430 million of revenue for FY 2020 ending December 31, 2020.
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.
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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.
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Joanna O'Brien Asst Vice President - 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 John E. Puchalla, CFA 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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