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Team Health have been affirmed and will be withdrawn at the close of the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,
$265 million senior subordinated notes due 2013, rated
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
Corporate Finance Group
Moody's Investors Service
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service