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20 Mar 2006
Approximately $700 million of affected debt
New York, March 20, 2006 -- Moody's Investors Service assigned a (P)B2 rating to the proposed
$450 million Senior Secured credit facilities and a (P)Caa1 rating
to the proposed $250 million subordinated notes of MultiPlan,
Inc. Moody's also assigned a Corporate Family Rating of (P)B2
to MultiPlan. The outlook for the ratings is stable. Moody's
will withdraw the ratings of MultiPlan ("Old") at the close
of the proposed transaction.
These rating actions follow the February 15, 2006, announcement
that the Carlyle Group ("Carlyle") will acquire MultiPlan,
Inc. for a total transaction value of $1.04 billion,
including the payment of transaction costs and other expenses.
Carlyle will fund the acquisition and the retirement of $116 million
of MultiPlan's existing debt through a $383 million equity
contribution as well as the proceeds from the proposed debt financing.
In connection with the proposed acquisition, Multiplan Merger Corporation
intends to issue new $450 million Senior Secured First Lien Credit
Facilities (including a $50 million revolver) and $250 million
of Senior Subordinated Notes. Following the completion of the acquisitions,
MultiPlan Merger Corporation will merge with MultiPlan, Inc ("Multiplan"),
the operating entity. At the completion of the merger, MultiPlan,
Inc. will remain as the surviving entity and MultiPlan Merger Corporation
will cease to exist.
The ratings reflect the considerable increase in financial leverage,
substantial drop in interest coverage, and the low level of free
cash flow compared to outstanding debt resulting from the proposed transaction.
With an increase in debt from $116 million at the end of 2005 to
$650 million upon the close of the proposed transaction,
the debt to adjusted EBITDA for the twelve months ended December 31,
2005 will increase to over 6.3 times at the end of 2006,
up from 1.6 times at the end of 2005. Similarly, interest
coverage, as measured by adjusted EBITDA to interest, falls
from 12 times at the end of 2005 to 1.6 times at the end of 2006.
After adjusting for operating leases, Moody's anticipates
that the free cash flow to debt ratio will fall from approximately 50%
in 2005 to a range of 4% to 6% at the end of 2006.
The ratings also consider the high concentration of revenues as the top
three customers account for almost 40% of revenues and its largest
customer accounts for over 25% of MultiPlan's revenues.
This concentration risk is partially offset by the following factors:
low customer turnover, long-term relationships, and
high customer switching costs.
The ratings also reflect the company's limited size and scope, pricing
pressure in its product lines, and the competitive nature of the
industry, especially for primary PPO network services. Moody's
is concerned that the company will try to offset these issues through
continued acquisitions of other managed care companies, which could
potentially pressure the existing credit metrics while increasing operational
Moody's believes that continued managed care consolidation could
negatively affect the company as its larger customers gain greater bargaining
power by expanding its membership base through acquisitions. Managed
care acquisitions could also result in lower demand for the company's
services if MultiPlan customers are able to fill in gaps in its existing
networks while establishing networks in new regions and states,
which may prove to better serve its clients through internal networks.
Moody's does note, however, that MultiPlan has benefited
from the recent wave of consolidation of payers as existing clients increased
the volume of claims that they submit through MultiPlan.
The ratings also consider MultiPlan's leading market share in the
provision of preferred provider organization services. MultiPlan
has been able to attract new customers and increase volume at existing
customers by expanding its already broad network of providers and facilities
while continuing to offer significant savings to both by obtaining deep
discounts from providers. Multiplan has also been able to improve
the timeliness and accuracy of reporting claims to its clients in addition
to lowering the cost to process these claims by establishing electronic
data interface links while using other technology to automate the re-pricing
MultiPlan's scalable technology platform has allowed the company
to effectively integrate the merger of U.S Health and realize the
anticipated synergies from this merger while managing rapid growth in
the processing of transaction volume with only minimal incremental costs.
While internal growth and the acquisition of U.S Health has resulted
in an increase of claims volume from 13.4 million in 2003 to 36.8
million in 2005, adjusted EBITDA margins expanded by 1600 basis
points during this same time period. Further, while revenue
doubled from $95 million at the end of 2003 to $194 million
at the end of 2005, total expenses increased only from $83
million to $105 million, despite a 70% increase in
sales and marketing expenses and over a 100% increase in operating
costs. Results did benefit from an $11 million drop in general
and administrative expenses in 2005. As such, MultiPlan was
able to generate $88 million in free cash flow while repaying $70
million in debt since the close of the U.S Health merger in April
As the largest provider of preferred provider organization networks,
the company benefits from the following favorable industry trends:
continued growth in enrollment in PPO plans at the expense of more restrictive
plans; continued medical inflation; an increase in volume of
claims due to demographics and new technologies and procedures.
As noted earlier, the company benefits from low churn in its customer
base and provider network.
The stable outlook reflects Moody's belief that the company will
increase revenues by 7% to 9% on an internal basis based
on the following factors: the ability to generate more claims from
existing customers by continued EDI implementation; expansion into
new geographies and the introduction of new products such as fee negotiation;
the addition of providers and the selective use of secondary extender
networks to broaden and deepen its network; ability to attract new
clients such as third party associations and regional managed care companies
while gaining deeper discounts through better discounts with existing
providers; continued medical cost inflation, and the establishment
of new reimbursement methodologies.
Moody's anticipates that solid revenue growth will translate into
free cash flow of $20 to $40 million over the next two years
due to stable operating margins, low working capital investments
and minimal capital expenditures. This will be offset by higher
interest expense resulting from additional debt related to the proposed
transaction. Moody's expects working capital to remain only
a slight use of funds and that the company will only need to spend between
$5 million to $10 million a year on capital expenditures
to support and maintain its existing infrastructure.
The ratings could face upward pressure if the company is able to accelerate
the rate of internal revenue growth while realizing cost synergies much
sooner than anticipated, which would likely result in a greater
expansion of operating cash flow and more rapid repayment of debt.
The ratings could also become more favorable if the company is able to
sustain adjusted operating cash flow and free cash flow to adjusted debt
ratios of 7% to 12% and 5% to 10%, respectively.
The ratings could face downward pressure if there is a significant delay
in expected debt repayment or a material contraction in the level of operating
cash flow. The ratings could also become more unfavorable if the
company's credit metrics deteriorate and result in operating cash
flow and free cash flow to adjusted debt ratios below 5% to 6%
and 3% to 4%, respectively. Further pressure
could arise if the company were to become highly reliant on its revolving
credit facility to fund its working capital and capital expenditure needs.
The (P)B2 ratings for the senior secured credit facilities reflect the
security and guarantee by all assets of MultiPlan and its subsidiaries.
The senior secured credit facilities are rated on the same level as the
corporate family rating due to the fact that the facility consists of
such a significant portion of the overall capital structure and may not
have adequate protection under a distressed scenario. Once the
transaction closes, Moody's expects that goodwill will account for
75% to 85% of total assets in 2006, which results
in minimal asset coverage and does not offer the company much in terms
of alternate liquidity.
The (P)Caa1 rating for the senior subordinated notes reflects the guarantee
of all of the assets of MultiPlan and its subsidiaries, the absence
of any security, and its structural subordination to the existing
senior secured credit facility. The notes are notched two levels
below the Corporate Family Rating and Senior secured credit facility as
they are subordinated to all existing and future Senior debt while representing
a significant portion of the company's overall capital structure.
Moody's expects that MultiPlan will have sufficient cushion within the
financial covenants of its proposed credit facility. The company
will have both a maximum leverage ratio and fixed charge coverage ratio
to comply with and Moody's anticipates that the company will remain in
compliance with the financial covenants under its credit facility for
the next twelve months. It is critical that MultiPlan commits to
paying down its Term Loan with excess cash in order to remain compliant
with its covenants, which is likely because of its low working capital
investment needs. While MultiPlan does not have much cash on hand,
Moody's rating incorporates our expectation that availability under the
company's $50 million proposed revolving credit facility will remain
at or near full capacity over the next twelve months.
The following ratings were assigned to MultiPlan, Inc.:
$50 million Senior Secured Revolver, due 2012, rated
$400 million Senior Secured Term Loan B, due 2013,
$250 million Senior Subordinated Notes, due 2016, rated
Corporate Family Rating, (P)B2
After the close of the proposed transaction, Moody's will
withdraw the following ratings assigned to MultiPlan ("Old"),
$20 Million Senior Secured Revolver due 2009, rated Ba3
$180 Million Senior Secured Term Loan due 2009, rated Ba3
Corporate Family Rating, Ba3
MultiPlan, Inc., based in New York, New York,
operates principally in the health care benefits field as a Preferred
Provider Organization ("PPO"), providing health care
cost management via contract arrangements between health care providers
and insurance carriers, HMO's, third party administrators
and Taft-Hartley benefit funds throughout the United States.
Corporate Finance Group
Moody's Investors Service
MOODY'S INVESTORS SERVICE ASSIGNS (P)B2 TO MULTIPLAN, INC.'S $450 MILLION SENIOR SECURED CREDIT FACILITY AND A (P)Caa1 TO $250 MILLION SENIOR SUBORDINATED NOTES. RATING OUTLOOK IS STABLE
Paul D. Bienstock
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service
No Related Data.
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