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Rating Action:

MOODY'S ASSIGNS (P)B2 RATING TO TEAM FINANCE'S PROPOSED CREDIT FACILITIES AND (P)Caa1 RATING TO PROPOSED SUBORDINATED NOTES OFFERED IN CONJUNCTION WITH THE ACQUISTION OF TEAM HEALTH; OUTLOOK IS STABLE

09 Nov 2005
MOODY'S ASSIGNS (P)B2 RATING TO TEAM FINANCE'S PROPOSED CREDIT FACILITIES AND (P)Caa1 RATING TO PROPOSED SUBORDINATED NOTES OFFERED IN CONJUNCTION WITH THE ACQUISTION OF TEAM HEALTH; OUTLOOK IS STABLE

Approximately $765 million of debt securities affected.

New York, November 09, 2005 -- Moody's Investors Service assigned a (P)B2 rating to the proposed credit facilities and a (P)Caa1 rating to the proposed subordinated notes of Team Finance LLC (an intermediate holding company) offered in conjunction with the leveraged buyout of Team Health, Inc. (the operating company). Moody's also assigned a corporate family rating of (P)B2 to Team Finance and a speculative grade liquidity rating of SGL-2. The outlook for the ratings is stable. The existing ratings of Team Health have been affirmed and will be withdrawn at the close of the proposed transaction. These rating actions follow the announcement that Team Health will be acquired by The Blackstone Group (Blackstone) in a transaction valued at approximately $1.0 billion. Blackstone and management are investing approximately $363 million of equity in the transaction.

The ratings reflect the considerable increase in financial leverage resulting from the transaction, supported by negative tangible book equity. The ratings also consider the slower revenue growth at Team Health in recent years resulting from the loss of revenue from the change in contracting for the military staffing business offset by growth in its other staffing businesses. Additionally, the ratings consider the dependence on the company's ability to recruit new physicians to drive revenue and volume growth. Moody's is also concerned with the lack of tangible book equity but is comforted somewhat by the implied market value of equity based on comparable transactions.

The ratings also reflect Team Health's leading market position in physician staffing and administrative services to emergency departments and military treatment facilities; favorable history of contract retention and growth; significant industry barriers to entry including physician relationships and experienced billing and collection methods. Additionally, results of operations indicate that the loss of revenue from the change in contracting for the company's military staffing business has not negatively affected the company's ability to generate cash flow or repay debt.

The stable outlook reflects the company's successful transition to the new government contracting model with limited deterioration of its operating results. Revenue from the military staffing business is expected to grow modestly from the present levels. Moody's also expects the company to experience continued growth of its core emergency department staffing business. Revenue growth in these areas and limited capital expenditure requirements should allow the company to repay debt with free cash flow.

Moody's assigned a speculative grade liquidity rating of SGL-2 to Team Finance reflecting our expectation that the company will have good liquidity over the next twelve months. Moody's expects the company to be able to fund all working capital and capital expenditure needs, which have historically approximated less than 1% of revenue, for the next twelve months out of operating cash flow. Moody's does not expect the company to draw significantly on its new $125 million revolver over the same period. Additionally, covenant levels on the new credit facility are not expected to limit the company's access to the available revolver. The SGL rating also reflects the fact that substantially all tangible and intangible assets of the borrower and guarantors will be encumbered under the terms of the proposed agreement.

Upward pressure on the ratings would result if the post-LBO company can service the increased debt burden and continue its current polity of debt reduction. For example, if adjusted cash flow from operations to adjusted debt and adjusted free cash flow to adjusted debt are expected to be sustainable above 10% and 7%, respectively, Moody's will consider upgrading the outlook or ratings.

However, if the company chooses to make a meaningful acquisition in the near term, prior to a significant amount of debt repayment, downward pressure on the rating could occur. Other factors that could constrain the rating include an increase in the level of uncollectible accounts, which is inherently high due to the nature of the company's business model, and exposure to medical malpractice claims in excess of amounts reserved.

Moody's notes that Team Health began to self insure its medical malpractice costs beginning in March 2003. The company records patient liability accrued expenses to its income statement based on assumptions by management reflecting the frequency and severity of claims, claims management processes and actual outcomes of litigation. If these estimates understate actual claims experience, cash flow could be negatively impacted. Team Health has benefited from the non-cash accruals for professional liability reserves during the start-up period of the self-insurance program. Cash flows will be affected in future periods, however, as claims are paid.

Pro forma for the transaction, Moody's expects cash flow coverage of debt for the year ending December 31, 2005 to be moderate for the B2 rating category. Adjusted cash flow from operations to adjusted debt and adjusted free cash flow to adjusted debt are expected to be approximately 6% and 5%, respectively. Leverage, defined as lease adjusted debt to adjusted EBITDA, is expected to be high at approximately 6.1 times.

The credit facilities are notched at the level of the corporate family rating due to their significance to overall debt capitalization. The senior subordinated notes are notched two levels below the corporate family rating due to their unsecured nature, contractual subordination, and limited collateral coverage.

The borrower is Team Finance LLC, an intermediate holding company. Health Finance Corporation, a shell corporation and subsidiary of Team Finance, will be co-issuer. The credit facilities will be guaranteed by Team Health, Inc., the operating company, and its subsidiaries. Security for the credit facilities will consist of 100% of the capital stock of the borrower's subsidiaries and 65% of foreign direct and indirect subsidiaries as well as substantially all tangible and intangible assets of the borrower and each guarantor.

The following summarizes Moody's rating actions.

Provisional ratings assigned -- Team Finance LLC

• $125 million senior secured revolving credit facility due 2011, rated (P)B2

• $375 million senior secured term loan B due 2012, rated (P)B2

• $265 million senior subordinated notes due 2013, rated (P)Caa1

• Corporate family rating, (P)B2

• Speculative grade liquidity rating, SGL-2

Ratings affirmed -- Team Health, Inc. (to be withdrawn at the close of the transaction):

• Senior secured revolving credit facility, B1

• Senior secured term loan, B1

• Senior subordinated notes due 2012, B3

• Corporate family rating, B1

Team Health, Inc., based in Knoxville, TN, is affiliated with over 5,000 healthcare professionals who provide emergency medicine, radiology, anesthesia, urgent care and pediatric staffing and management services to over 490 civilian and military hospitals, surgical centers, and clinics in 44 states. For the twelve months ended September 30, 2005, Team Health recognized net revenues after provision for doubtful accounts of approximately $1 billion.

New York
Patrick Finnegan
Managing Director
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

New York
Dean Diaz
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

No Related Data.
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