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Rating Action:

MOODY'S RATES MULTIPLAN'S BANK FACILITIES Ba3; OUTLOOK IS STABLE

05 Aug 2004

Approximately $200 million of debt securities affected.

New York, August 05, 2004 -- Moody's Investors Service today assigned a Ba3 senior implied rating to MultiPlan, Inc. and Ba3 ratings to the company's $180 million term loan and $20 million revolver. MultiPlan entered into the credit facilities on March 4, 2004 to fund the acquisition of the Network Services Business (U.S. Health) from the U.S. Health division of BCE Emergis. This is the first time Moody's has assigned ratings to the company. The outlook for the company is stable.

The following ratings were assigned:

• $20 Million Senior Secured Revolver due 2009, rated Ba3

• $180 Million Senior Secured Term Loan due 2009, rated Ba3

• Senior Implied Rating, rated Ba3

• Senior Unsecured Issuer rating, rated B1

The outlook is stable.

The ratings reflect the company's moderately high leverage, its limited size and scope, pricing pressure in its product lines, and the competitive nature of the industry, especially for primary PPO network services. The ratings further reflect customer concentration risk, which is partly mitigated by the long-term nature of MultiPlan's relationship with its top customers. Moody's is also concerned about integration risks related to the acquisition of U.S. Health. The acquisition is the largest in MultiPlan's history, and is for an operation equal in size to the company.

Key credit strengths considered by Moody's include the company's strong position in the industry, particularly for complementary network access, MultiPlan's mostly favorable performance in recent years, and good fundamentals anticipated for the industry. Moody's expects continued industry growth driven by the shift to PPO products from other forms of health insurance, the increase in utilization of services, the aging of the population and medical cost inflation.

Additional positive factors recognized by the ratings include the company's relatively good free cash flow generation, which is due in part to the limited capital expenditures requirement of the business, and Moody's expectation for the company to delever and manage its capital structure conservatively. Moody's also notes that the company's interest coverage is very strong for its rating category, given the low interest expense of the capital structure.

The stable outlook anticipates consistent performance at Multiplan, with growth in revenues, EBITDA and cash flow following trends from recent years. Margins will likely remain under pressure, although MultiPlan may offset the impact through the realization of acquisition expense synergies. Moody's expects cash flow from operations less capital expenditures to remain good. We expect free cash flow to be used to fund an annual dividend to the founder and to fund small acquisitions, with the remaining amount used to reduce debt.

Moody's ratings and outlook already incorporate the expected deleveraging over the next twelve to twenty-four months. As a result, unless the company materially exceeds our expectations, it is unlikely the ratings will be revised upwards during this period. Moody's will consider revising the outlook or ratings if the company's free cash flow (after the dividend to the owner) coverage of debt (including 75% of preferred stock) approaches 20%, assuming business risk has not increased.

However, Moody's may downgrade the ratings if MultiPlan completes a major acquisition, encounters difficulty with the integration, or experiences a sustained decline in profitability due to an inability to offset pricing pressures through higher volume and revenues or through expense reductions. Moody's would likely downgrade the company's ratings if we believe the company will be unable to produce sustainable free cash flow coverage of debt above 10%.

Multiplan entered the credit agreement on March 4, 2004. Proceeds were used to partly fund the acquisition of U.S. Health. The company raised additional financing through the sale of $144.7 million of preferred stock to General Atlantic Partners ("GAP") for a 40% ownership stake in the company. The founder of the company received a dividend from the preferred stock proceeds.

Moody's rated the bank credit facilities at the same level as the senior implied. We did not notch the bank debt above the senior implied since it represents a high percentage of the capital structure.

In analyzing the capital structure, Moody's considered a portion of the preferred stock to be debt. Under Moody's analytical framework for hybrid securities, the preferred stock falls into bucket B and is treated as 75% debt and 25% equity. The preferred instrument is treated substantially as debt due to a put feature, exercisable by GAP under certain conditions, which requires MultiPlan to redeem the securities five years from the close of the transaction. However, the preferred stock can only be repaid 6 months after the repayment of the bank credit facilities. Since the preferred dividend is pay-in-kind, Moody's did not adjust the company's interest coverage metrics.

Historically, MultiPlan did not rely on debt to fund its growth. However, as a result of the acquisition and the dividend to the founder, Multiplan now has a highly leveraged capital structure (adjusted for preferred stock and leases). Over the next couple of years, Moody's is anticipating that the ratio of free cash flow to debt to range from 12% to 15%. The company's interest coverage is expected to be quite strong, however, with the ratio of EBIT to interest expense to be approximately 10 times. The ratio of adjusted debt to EBITDAR will be moderately high, starting near 4 times for 2004 and, depending on the company's performance, dropping to 3 to 3.5 times over the next couple of years. In calculating adjusted debt, Moody's included 75% of the value of the preferred stock and 8 times the company estimated rental expense.

MultiPlan, Inc., headquartered in New York, NY, is a leading stand-alone PPO network. The company provides primary and complementary network access and services to customers including health benefits companies, self insured employers and third party administrators.

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

New York
William K. Lee
Associate Analyst
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

MOODY'S RATES MULTIPLAN'S BANK FACILITIES Ba3; OUTLOOK IS STABLE
No Related Data.
© 2019 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.

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