GHX Ultimate Parent Corp. Assigned 'B' Rating, New Debt Rated; Subsidiary Ratings Affirmed And Then Withdrawn
- Temasek Holdings is acquiring a majority stake in GHX Ultimate Parent Corp., a parent company of Global Healthcare Exchange LLC. (B/Stable/--), in a leveraged transaction. We estimate pro forma funded leverage will increase to 8.8x from 7.4x.
- While leverage increases as a result of the transaction, we continue to expect the company to generate moderate discretionary cash flow.
- We are affirming our 'B' corporate credit rating on Global Healthcare Exchange. The outlook is stable.
- At the same time, we are assigning our 'B' corporate credit rating to GHX Ultimate Parent Corp. (GHX). The outlook is stable. We consider Global Healthcare Exchange to be a core subsidiary of GHX and will view the two companies on a consolidated basis and as such, are equalizing the ratings. We are subsequently withdrawing the corporate credit rating on Global Healthcare Exchange LLC.
- In addition, we are assigning our 'B' issue-level rating to GHX's proposed first-lien credit facilities, with a '3' recovery rating.
- The stable outlook reflects solid revenue visibility and our expectation that revenue will grow at a mid- to high-single-digit pace and the company's EBITDA margins will expand, enabling it to continue to generate moderate discretionary cash flow, despite higher leverage.
TORONTO (S&P Global Ratings) June 6, 2017--S&P Global Ratings today affirmed its 'B' corporate credit rating on Global Healthcare Exchange LLC. The outlook is stable. At the same time, we assigned our 'B' corporate credit rating to GHX Ultimate Parent Corp., a parent company of operating subsidiary Global Healthcare Exchange. The outlook is stable. We subsequently withdrew our corporate credit rating on Global Healthcare Exchange. In addition, we assigned a 'B' issue-level rating and '3' recovery rating to GHX's proposed $518 million first-lien credit facilities, which include a $30 million revolving credit facility and a $488 million term loan. The recovery rating is '3' indicating our expectation for meaningful (50%-70%; rounded estimate: 55%) recovery in the event of a payment default. Proceeds of the proposed facilities will be used to fund Temasek's purchase of a majority stake in the company, including repaying Global Healthcare Exchange's current debt. We expect to withdraw the existing issue-level rating on Global Healthcare Exchange's debt once it is repaid. "Despite an increase in leverage, we affirmed the ratings on Global Healthcare Exchange because we continue to expect the company will generate moderate free cash flow," said S&P Global Ratings credit analyst Adam Dibe. We expect revenue and EBITDA will grow at a relatively rapid rate due to upselling services to core exchange members and operating leverage. We think capital expenditures, excluding capitalized software costs, will be relatively low and working capital will be a modest source of cash as the company grows because it receives payment in advance. Further, we expect the company will pay dividends in-kind on the preferred stock. The rating also reflects the company's relatively small size and narrow business focus on a cloud-based exchange, which makes GHX vulnerable to competitive threats and unforeseen shifts in the supply chain or technology. The company provides a service for a niche market, which makes it vulnerable to changes in the marketplace. We view the business as a service rather than one based on a proprietary information technology platform. While the company processes considerable dollar volume and is a leader in this niche, the health care Software as a Service (SaaS) market has very few barriers to entry that would prevent a larger competitor from expanding further into cloud-based exchange services and providing better solutions to GHX's customers. We view the services that GHX provides as vulnerable to unforeseen shifts in the supply chain or technology, such as standardization of product information, more transparency on pricing, and consolidation among group purchasing organizations (GPOs) that could threaten the value-added benefits of the business model. The stable outlook reflects our expectation that the company's revenue will grow at a mid- to high-single-digit rate and that its margins will expand, enabling the company to generate free cash flow despite very high leverage. We could lower the rating if competitive threats result in an unexpected shortfall in contract renewals and contract price pressures that leads to margin contraction. Such an occurrence could result in revenue declining at a low-single-digit rate, the EBITDA margin decreasing by 100 basis points or more, and in marginal free cash flow generation and FFO coverage of cash interest deteriorating to below 1.5x. This could also change our perception of GHX's business and lead us to revise downward our business risk assessment. Given very high leverage and variable rate debt, a 250-basis-point increase in interest rates could also lead to a decline in FFO coverage of cash interest to below 1.5x. Lastly, if the company remains acquisitive and meaningful integration costs continually depress cash flow, we could also consider lowering the rating. While unlikely, we could raise the rating if reported leverage declines to less than 5x and we believe the company's financial policy is committed to maintaining reported leverage at that level.
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Certain terms used in this report, particularly certain adjectives used to express our view on rating relevant factors, have specific meanings ascribed to them in our criteria, and should therefore be read in conjunction with such criteria. Please see Ratings Criteria at www.standardandpoors.com for further information. Complete ratings information is available to subscribers of RatingsDirect at www.globalcreditportal.com and at www.spcapitaliq.com. All ratings affected by this rating action can be found on the S&P Global Ratings' public website at www.standardandpoors.com. Use the Ratings search box located in the left column.
| Primary Credit Analyst: | Adam Dibe, Toronto (416) 507-3235; adam.dibe@spglobal.com |
| Secondary Contact: | Tulip Lim, New York (1) 212-438-4061; tulip.lim@spglobal.com |
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