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Rating Action:

Moody's affirms Performant's B3 CFR; changes outlook to negative

Global Credit Research - 25 Apr 2016

Approximately $80 million of rated debt affected

New York, April 25, 2016 -- Moody's Investors Service ("Moody's") affirmed the B3 Corporate Family Rating ("CFR") of Performant Business Services, Inc. ("Performant"), its B3 senior secured debt rating, and its Caa1-PD Probability of Default rating. Additionally, Moody's downgraded Performant's Speculative Grade Liquidity rating to SGL-3, from SGL-2, and changed the ratings outlook to negative, from stable.

Affirmations:

..Issuer: Performant Business Services, Inc.

.... Corporate Family Rating (Local Currency), B3 Affirmed

.... Senior Secured Bank Credit Facilities, maturing 2017, 2018, B3 Affirmed

.... Probability of Default Rating, Caa1-PD, affirmed

Downgrade:

Speculative Grade Liquidity Rating, Downgraded to SGL-3, from SGL-2

Outlook, Changed to Negative, from Stable

... RATINGS RATIONALE

The B3 CFR takes into account the impact of decisions by the Department of Education ("DoE") over the past two years that will cause revenues in Performant's largest operating segment to contract meaningfully again in 2016, as they did in 2015. While there was an expected mid-2015 spike in leverage, to 5.0 times on a Moody's adjusted basis, the company's aggressive cost cutting in response to both a diminished student loan business and the dramatically reduced scope of audits on behalf of the Centers for Medicare and Medicaid ("CMS") has enabled Performant to keep leverage in check. At year-end it stood at 3.9 times. However, with the potential for another, roughly 20% falloff in revenues this year, and the halving of EBITDA, Performant could see leverage rise back to approximately 5.0 times. This leverage level, along with Performant's very small scale and heavy customer concentration, is consistent with the B3 rating category.

The negative outlook reflects not only expectations for a significant decline in revenues and profits this year, but also pronounced uncertainty regarding both the likelihood and the timing of reinstatements of contracts for Performant's DoE and CMS businesses. The negative outlook also reflects the company's diminishing but still adequate liquidity position, and uncertainty over timing of the funding of reserves established to meet claims appeals pursued successfully by healthcare provider counterparties. Concerns over high leverage and diminished operating performance are allayed partially by the company's continued strong cash balance, which represents 71% of its $70 million debt obligation.

Ratings could be downgraded if:1) the falloff in student loan revenues fails to reverse itself; 2) the failure to get the CMS contract renewed compels Performant to abandon its CMS collections business, or; 3) liquidity deteriorates. While unlikely in the near term, given the negative outlook, a ratings upgrade could occur if:1) there is a turnaround in the student loan business, resulting, most probably, from a reinstatement of the DoE contract, and; 2) the CMS contract is renewed with audit volumes showing a healthy rebound, which, together with a reinvigorated student loan business, would bolster profits and bring leverage below 4.5 times for a sustained period.

Performant Business Services, Inc. (Performant), a wholly-owned subsidiary of publicly traded Performant Financial Corporation (PFMT; Nasdaq), is a leading provider of audit and recovery services for organizations in the public and private sectors. More than two thirds of expected 2016 revenues of $125 million are derived from the recovery and restructuring of defaulted student loans, while fees from healthcare payment collections, primarily on behalf of the CMS, and delinquent-tax collections constitute the balance of revenues. Management and affiliates of private equity investor Parthenon Capital Partners continue to own a substantial stake in Performant, although Parthenon has been divesting its ownership, which currently stands at about 27%.

The principal methodology used in these ratings was Business and Consumer Service Industry published in December 2014. Please see the Ratings Methodologies page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt 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 rating action on the support provider and in relation to each particular 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 rating action, and whose ratings may change as a result of this 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.

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

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.

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

Lenny J. Ajzenman
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

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

Moody's affirms Performant's B3 CFR; changes outlook to negative
No Related Data.
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