S&P: Premier Dental Services Inc. Ratings Raised To 'B-' From 'CCC+' On Stronger Operating Performance; Outlook Stable
The recovery rating on the senior secured debt remains a '3', indicating expectations of meaningful (50% to 70%; at the lower end of the range) recovery in a payment default.
"Our upgrade of Premier Dental reflects our expectation that the company's operations will remain stabilized, it will maintain its position in the Medicaid and affordable dental market, and it will generate modest free cash flow," said S&P Global Ratings credit analyst Matthew Todd.
Premier Dental's financial stability and positive cash flows are the result of a return to positive revenue growth in the low - to mid-single digits and an EBITDA margin expansion of several hundred basis points. This operational improvement follows several changes that a new management team implemented to boost revenue and reduce expenses. We are forecasting modestly positive free cash flows because of the revenue and margin improvement, a reduction in capital expenditures by about $6 million to $8 million (28%-38%), and a small source from working capital. We also believe that the company's liquidity has improved from its cash balance of $43 million at March 31, 2016, and that the revised covenants will provide sufficient cushion to absorb at least a 15% decrease in EBITDA.
Our stable outlook reflects our expectation that the company will maintain its recent patient volumes and grow revenue in the low single digits. We do not expect the company to grow through de novo offices due to the high start-up costs that previously pressured the company's financial standing. We expect free cash flows to remain positive and above 2015 levels, and we believe any acquired dental offices will not have the same drag on profitability as de novo offices.
We could consider lowering the rating should Premier experience greater-than-expected competition in its offices with high exposure to Medicaid, causing us to forecast revenue to decrease and gross margins to tighten by several hundred basis points. In this scenario, we would expect the company to experience difficulty refinancing its debt due in November 2018.
An upgrade would be predicated on Premier improving its profitability in line with other health care providers. If the company can successfully grow revenues at existing offices by increasing the number of complex dental procedures and orthodontic starts, the company could exceed our expectations and expand adjusted EBITDA margins at or above 15%.
We would not likely raise the rating due to lower leverage because we view deleveraging as temporary due to the company's private equity owners.
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