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Rating Action:

Moody's affirms ADMI Corp.'s B2 Corporate Family Rating, outlook changed to negative

11 Jun 2021

New York, June 11, 2021 -- Moody's Investors Service, ("Moody's") affirmed ADMI Corp.'s ("ADMI") B2 Corporate Family Rating, the B2-PD Probability of Default Rating, and the B2 ratings on the first lien senior secured term loan, first lien senior secured revolving credit facility. Moody's also assigned a B2 rating to the company's proposed $700 million add-on first lien senior secured term loan. The rating outlook is changed from stable to negative.

The rating actions follow the announced incremental $700 million term loan which combined with $150 million of cash from the balance sheet will be used to fund a $835 million distribution to shareholders.

The affirmation of the B2 Corporate Family Rating reflects Moody's expectation that the company will see leverage improvement following the shareholder distribution given the ADMI's strong earnings outlook and the ability to achieve synergies for the acquisition of CC Dental Implants Holding, LLC ("ClearChoice") including procurement savings, SG&A and marketing cost synergies. Moody's expects the company to generate consistent positive free cash flow. Aspen Dental and ClearChoice patient volumes have returned to near pre-coronavirus levels, and the combined entity's performance to date in 2021 exceeded our previous expectations. The affirmation is also supported by ADMI's good liquidity and Moody's expectation that the company will generate over $90 million in annual free cash flow and access to a $350 million revolving credit facility (which is being upsized by $100 million as part of the recapitalization).

The change in outlook to negative reflects the more aggressive nature of ADMI's financial policies, a key governance issue. ADMI will be meaningfully increasing leverage to fund a very large shareholder distribution, which come only 6 months after the increased leverage to fund the $1.135 billion acquisition of ClearChoice. Leverage, pro-forma for the distribution and a full year of ClearChoice, rises to 7.4x. Combined with higher initial gross financial leverage, and the use of a significant portion of its cash balances to fund the distribution, there is a greater risk that debt/EBITDA will remain above 6.0x beyond the next 12-18 months. ADMI more weakly positioned to absorb any unexpected operating setbacks or incremental debt and the company will need to continue to execute at a high level to reduce leverage.

Moody's took the following rating actions:

ADMI Corp.

Ratings Affirmed:

Corporate Family Rating affirmed at B2

Probability of Default Rating affirmed at B2-PD

$350 million Gtd Senior Secured First Lien Revolving Credit Facility affirmed at B2 (LGD3)

$920 million Gtd Senior Secured First Lien Term Loan affirmed at B2 (LGD3)

$1,200 million Gtd Senior Secured First Lien Term Loan add-on affirmed at B2 (LGD3)

Ratings assigned:

$700 million Gtd Senior Secured First Lien Term Loan add-on assigned at B2 (LGD3)

Outlook action:

Outlook, changed to negative from stable

RATINGS RATIONALE

ADMI's B2 Corporate Family Rating reflects its elevated pro forma financial leverage of approximately 7.4x following its shareholder distribution and recent acquisition of ClearChoice. The rating also incorporates the integration risk surrounding the acquisition. The rating is constrained by aggressive de novo growth strategies and a high proportion of self-pay revenues in both businesses. Moody's expects that ADMI will resume new office openings and growth capital expenditures as the risk from the coronavirus pandemic ebbs. The rating also reflects the risk that growth slows and cash flow materially weakens from recent levels as temporary demand surges normalize.

The rating is supported by the combined entity's strong market presence as a differentiated dental service provider with few competitors of scale. The ClearChoice acquisition has added scale, allowing ADMI to access the fast-growing high-end full arch replacement market. ADMI benefits from favorable industry dynamics, with a growing market of edentulous patients, due to the aging population. Further, ADMI has a national footprint and good geographic diversification. ADMI has historically demonstrated positive trends in same-store sales growth, and Moody's believes that there are opportunities for referrals between ADMI and ClearChoice. Lastly, the expectation of solid free cash flow is driven by generally low maintenance capital expenditures and ClearChoice's revenue cycle which includes upfront payments by patients.

Moody's anticipates that ADMI will maintain good liquidity post-closing, supported by an upsized, undrawn $350 million revolving credit facility and post-transaction cash balance of $143 million. Moody's expects ADMI to generate about $94 million of free cash flow in 2022, supported through there could be some variability depending on changes in deferred revenue from the ClearChoice business.

ADMI and Aspen Dental practices face social risks such as the rising concerns around the access and affordability of healthcare services. However, Moody's does not consider the DSOs to face the same level of social risk as many other healthcare providers because they rely less on government and commercial insurers. That being said, ClearChoice faces other social risks such as reputational risks given the highly consumer driven model. Bad reviews on-line or bad publicity stemming from a small number of unhappy clients could result in material harm to the company's revenue and cash flow. From a governance perspective, Moody's expects ADMI's financial policies to remain aggressive due to its private equity ownership.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

The ratings could be downgraded if the company's liquidity weakens or if Moody's expects debt/EBITDA will be sustained above 6.0 times for an extended period. A material reduction in free cash flow or additional debt funded transactions could also result in a ratings downgrade. Additionally, if the ratings could be downgraded if Aspen experiences material integration related disruption.

An upgrade is possible if Aspen Dental adopts more conservative financial policies and maintains debt/EBITDA below 4.5 times. Additionally, effective management of growth that resulted in improved profitability and cash flow, and successful integration of ClearChoice could support an upgrade.

ADMI provides business support services to its 895 affiliated dental offices across 43 states, while Clearchoice serves a network of 70 affiliated dental implant centers across 28 states. ClearChoice practices are the leading national provider of fixed full-arch dental implants and related treatments. The company is privately-held and majority owned by Ares Management, LP and Leonard Green & Partners, L.P., with the remaining 20% owned by American Securities, management and dentists. The company's audited financials do not consolidate the practice ownership program ("POP") practices. As of March 31, 2021, excluding POP offices, ADMI generated consolidated net patient revenues of approximately $900 million, while the combined net patient revenues including POP offices was approximately $2.3 billion for the same period.

The principal methodology used in these ratings was Business and Consumer Service Industry published in October 2016 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1037985. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1263068.

At least one ESG consideration was material to the credit rating action(s) announced and described above.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Jaime Johnson
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Jessica Gladstone, CFA
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

No Related Data.
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