Air Medical Group Holdings Inc. Ratings Affirmed On Acquisiton Agreement; New Debt Rated
- TORONTO (S&P Global Ratings)today Sept. 8, 2017—Air Medical Group Holdings Inc. entered into a definitive agreement to acquire Envision Healthcare Corp.'s medical transport business (American Medical Response) for $2.4 billion. The transaction will be funded by a $1.455 billion incremental term loan B, a $730 million unsecured term loan, and preferred equity.
- Pro forma the acquisition, adjusted leverage rises to the mid-7x area for 2018, up from our previous forecast of 5x-6x.
- We are affirming our 'B' corporate credit rating on Air Medical. The outlook is stable.
- We are also affirming our 'B' rating on Air Medical's senior secured facility and 'CCC+' rating on the unsecured notes. Furthermore, we are assigning a 'CCC+' rating to the proposed unsecured term loan.
- The stable outlook reflects our expectation for mid-single-digit revenue growth for the combined company, enabling EBITDA expansion-based deleveraging and moderate free cash flow generation. We expect the company will fund business development activity by internally generated cash flows.
On Sept. 8, 2017, S&P Global Ratings affirmed its 'B' corporate credit rating on Air Medical Group Holdings Inc. The outlook is stable. At the same time, we affirmed our 'B' issue-level rating on Air Medical's $3.405 billion senior secured term loans, which include the proposed $1.455 billion incremental term loan. The recovery rating is '3' and reflects our expectation for meaningful (50%-70%; rounded estimate: 65%) recovery in the event of payment default. We also affirmed our 'CCC+' issue-level rating on the $370 million unsecured notes. The recovery rating is '6' and reflects our expectation for negligible (0%-10%; rounded estimate: 0) recovery in the event of payment default. Lastly, we assigned our 'CCC+' issue-level rating to the proposed $730 million unsecured term loan. The recovery rating is '6' and reflects our expectation for negligible (0%-10%; rounded estimate: 0) recovery in the event of payment default. Although we expect Air Medical's leverage to increase and margins to contract because of the acquisition of the American Medical Response (AMR) unit of Envision Healthcare Corp., our rating affirmation reflects the increase in scale, diversification, market position, and improvement in earnings stability from the acquisition. Furthermore, we expect the combined entity will generate moderate free cash flow. We estimate pro forma adjusted debt leverage, including year one anticipated synergies and incorporating restructuring costs as well as considering the preferred stock as debt-like, to be around the mid-7x area for the fiscal year ending Dec. 31, 2018, compared with our prior expectations of leverage in the 5x-6x range. Our stable rating outlook reflects our expectation that Air Medical's leverage will be in the 7x-8x range by end of 2018. The rating includes tolerance for some volatility around our base case because of external factors such as weather and uncompensated care. It also includes our expectation that the company will use the majority of free cash flow for tuck-in acquisitions. We could lower the rating if the company's leverage increases above 8x or free cash flow falls to negligible levels. This could be the result of material weakness in operating performance or higher-than-expected integration costs that leads to about a 100-basis-point decline in EBITDA margins from our base-case scenario. This scenario would also reduce interest coverage and cash flow generation. We could raise the rating if the company reduces leverage to around 6x. We also have to be convinced that the company would sustain leverage at this level. We believe this scenario is unlikely over the next 18 months.
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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: | Maryna Kandrukhin, New York 212-438-2411; maryna.kandrukhin@spglobal.com |
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