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Verscend Holding Corp. -- Moody's affirms Cotiviti's CFR; upgrades first lien to B2; outlook stable

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Rating Action: Moody's affirms Cotiviti's CFR; upgrades first lien to B2; outlook stableGlobal Credit Research - 02 Feb 2021Nearly $5.1 billion of rated debt affectedNew York, February 02, 2021 -- Moody's Investors Service, ("Moody's") affirmed Verscend Holding Corp.'s (dba "Cotiviti") B3 corporate family rating ("CFR") and B3-PD probability of default rating. Moody's upgraded instrument ratings to B2, from B3, on the healthcare information technology and analytics provider's first-lien debt, which includes a $300 million revolving facility and a term loan that is being upsized to $3.69 billion, from $3.14 billion. Proceeds from the incremental term loan, from a new, $275 million second-lien term loan (unrated), $150 million of preferred equity, and $128 million of cash from Cotiviti's balance sheet will be used to acquire, with backing from Cotiviti's private equity owner Veritas Capital, certain assets from another Veritas-backed company that that company is currently buying from publicly traded entity HMS. The assets that Cotiviti will be acquiring, indirectly, from HMS are related to commercial coordination of benefits, population health management, and Medicare- and health-plan-related payment integrity ("PI") assets. Cotiviti's outlook remains stable.Affirmations:..Issuer: Verscend Holding Corp..... Corporate Family Rating, Affirmed B3.... Probability of Default Rating, Affirmed B3-PD....Senior Unsecured Regular Bond/Debenture, Affirmed Caa2 (LGD6) from (LGD5)Upgrades:..Issuer: Verscend Holding Corp.....Senior Secured Bank Credit Facility, Upgraded to B2 (LGD3) from B3 (LGD3)Outlook Actions:..Issuer: Verscend Holding Corp.....Outlook, Remains StableRATINGS RATIONALECotiviti's strategic, mostly debt-funded acquisition of additional IT and analytics capabilities from the HMS assets will increase Moody's-adjusted, pro-forma opening debt-to-EBITDA leverage by just over a half turn, to about 7.7 times. This leverage level is nevertheless improved by more than two turns from when we rated the company in August 2018 when Verscend, with Veritas's backing, undertook a heavily leveraged acquisition of Cotiviti. As a result, Moody's views Cotiviti today as more securely positioned within the B3 CFR, despite the moderately leveraging impact from the addition of the HMS assets. By the end of 2021, Moody's expects Cotiviti's leverage to ease towards 6.5 times, and for free cash flow as a percentage of debt to approach 5%, both measures positioning the company comfortably in the B3 CFR.Since the 2018 merger of Verscend and Cotiviti, the combined company has successfully managed rapid growth and synergy realization while improving its liquidity. It continued to achieve these successes through the COVID-19 pandemic in 2020, when mid-single-digit revenue declines, due to timing delays caused by pandemic related cancellations of elective procedures, mostly in the second quarter, were offset by cost cutting efforts that boosted the company's already strong profit margins. Cotiviti has delivered on what Moody's had viewed as an aggressive goal of nearly $200 million in operating synergies. The resultant reduction in addback assumptions has improved Cotiviti's quality of earnings as well. Demand for elective and preventative procedures and services ramped up in the latter half of the year as states eased lock-up guidelines and as telemedicine was increasingly employed. Ratings are supported by Cotiviti's leading revenue scale in prospective- and retrospective medical-claims-accuracy solutions, a developing segment of healthcare whose fundamentals Moody's expects will provide tailwinds.The addition of the HMS Medicare assets boosts Cotiviti's $1.1 billion revenue base by nearly 20%. HMS's post-payment capabilities (in areas such as clinical claims review, fraud, and data mining) would complement Cotiviti's strong presence in pre-payment claims solutions. Management sees cost reduction opportunities through headcount reduction and, mostly, non-headcount efficiencies through scale benefits, platform integration and vendor consolidation, and the elimination of public company costs. The nearly $50 million in savings goals are ambitious relative to the target entity's $31 million in acquired EBITDA, but Moody's notes Veritas's overachievement in realizing profitability gains with both Verscend's predecessor company (Verisk Health) and Cotiviti itself. Moody's also considers governance matters as a driver of the ratings action. The company has delevered to levels more appropriate for the CFR, and in this transaction it is incorporating preferred equity that helps subdue the acquisition's leveraging impact.The slowdown in 2020 notwithstanding, Cotiviti has realized revenue growth in recent years that has exceeded the PI market's mid-single digit revenue growth. Moody's expects the company to again exceed overall industry growth over the next 12 to 18 months, given the strength of its offerings, customer relationships, and market position. Industry tailwinds include favorable demographics, the need to contain rising healthcare spend, increasing regulatory complexity, and eligibility expansion of Medicaid and Medicare.A healthy and quickly building cash balance, to over $200 million in 2021, and no drawings under Cotiviti's $300 million revolver through all of 2020 and, Moody's expects, through 2021 as well, underscore the company's adequate and improving liquidity position. Pro-forma for the nearly $120 million that will be swept to effect the HMS acquisition, Cotiviti at December 31, 2020 has a better than $110 million cash balance. Moody's expects free cash flow of better than $200 million in 2021. Since the merger with Verscend in August 2018, the company has not needed to draw from its ample $300 million revolving credit facility. Moody's expects the combined company to realize revenue growth of at least 10% while, with the realization of management's forecast synergies, EBITDA margins will approximate 50%, the strongest among our rated universe of healthcare analytics companies. Required annual amortization payment on the term loan is $37 million, while interest expense is about $325 million a year and capex is nearly $150 million. The revolving credit facility (only) has a springing first-lien net leverage ratio covenant, applicable when at least 35% of the revolver is drawn. It is set very loosely, at 8.5 times. We do not expect revolver drawings will trigger the covenant requirement over the next twelve months. Neither the term loan nor the unsecured notes are subject to financial maintenance covenants.The ratings for Cotiviti's debt instruments reflect both the overall Probability of Default of the company, reflected in the B3-PD Probability of Default rating, and a loss given default assessment of the individual debt instruments. Because Cotiviti's capital structure at the time of our original, 2018 ratings assignment had been unusually levered -- leverage through the first lien was (and continues to be) about 6.0 times, on a Moody's-adjusted basis -- and because the company had been weakly positioned in the B3 CFR, Moody's reasoned that a B3 facility rating more accurately captured the risk that first-lien lenders face. In this transaction, both the introduction of $275 million of second-lien debt, which adds instrument-ratings support to Cotiviti's first lien debt, and the stronger overall credit profile of the company, compel Moody's to upgrade the first-lien debt to B2, in accordance with our LGD framework.The stable rating outlook reflects our expectation that as regions gradually reopen across the country, consumer demand for elective and preventative procedures will revert to normalized levels. Revenue in 2021, after falling mid-single-digit percentages in 2020, will rebound to grow at better than 10%. Economies of scale and judicious cost cutting will enable the company to continue to deliver very strong, roughly 50% EBITDA margins. Moody's expects leverage will moderate towards 6.5 times in 2021.FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGSMoody's would consider a ratings upgrade if: i) Cotiviti is able to deliver healthy revenue gains while maintaining profitability and good liquidity; ii) Moody's expects debt-to-EBITDA will be sustained below 6.5 times, and; iii) we expect free cash flow as a percentage of debt will be sustained above 5%. Moody's would consider a downgrade if: i) the improving debt-to-EBITDA leverage trend reverses itself; ii) Moody's expects free cash flow to deteriorate to breakeven, or; iii) Moody's anticipates liquidity will deteriorate.With Moody's-expected 2021 revenues approaching $1.5 billion, Verscend Holding Corp. (dba "Cotiviti", headquartered in Atlanta, GA) provides data analytics services to healthcare insurance payors and healthcare providers that enable those customers to drive financial performance. Private equity sponsor Veritas Capital Fund Management bought Verscend from parent company Verisk Analytics in June 2016. In August 2018 the company closed on the $4.9 billion acquisition of Cotviti, a leading provider of technology-enabled pre- and post-payment integrity solutions to health insurers and the CMS, as well as to retail businesses.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. 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. 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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. Kevin Stuebe 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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