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Rating Action:

Moody's affirms VVC Holding Corp.'s B3 CFR following acquisition of athenahealth, outlook stable

24 Jan 2019

New York, January 24, 2019 -- Moody's Investors Service ("Moody's") affirmed VVC Holding Corp.'s (d/b/a "Virence", formerly GE Healthcare's Value Based Care Division) B3 Corporate Family Rating and B3-PD Probability of Default Rating following the company's announcement that it will acquire athenahealth, Inc. ("athenahealth"). Concurrently, Moody's assigned B2 ratings to Virence's proposed $400 million senior secured revolving credit facility and $3,660 million senior secured first lien term loan. Virence has also placed a proposed $800 million senior secured second lien term loan which is unrated. The ratings outlook is stable.

Proceeds from the proposed issuance, $85 million of athenahealth balance sheet cash and $2,337 million of new cash and preferred equity will be used to fund Virence's acquisition of outstanding athenahealth equity, refinance existing Virence indebtedness and fund cash to the balance sheet as well as $300 million of estimated fees and expenses. Upon the completion of the transaction, VVC Holding Corp. and athenahealth, Inc. will be co-borrowers for the proposed credit facilities, guaranteed by parent company Virence Intermediate Holdings LLC. Moody's anticipates the withdrawal of existing Virence debt instrument ratings following the refinancing. Virence Intermediate Holdings LLC will be owned by funds affiliated with private equity sponsor Vertias Capital.

Affirmations:

..Issuer: VVC Holding Corp.

.... Corporate Family Rating, Affirmed B3

.... Probability of Default Rating, Affirmed B3-PD

Assignments:

..Issuer: VVC Holding Corp.

....Gtd Senior Secured 1st lien Revolving Credit Facility, Assigned B2 (LGD3)

....Gtd Senior Secured 1st lien Term Loan, Assigned B2 (LGD3)

Outlook Actions:

..Issuer: VVC Holding Corp.

....Outlook, Remains Stable

RATINGS RATIONALE

The B3 Corporate Family Rating reflects risks associated with the combined company's very high financial leverage with debt / EBITDA of about 10x based on LTM September 30, 2018 results, pro forma for the transaction, excluding certain one-time expenses and treating capitalized software as an expense. Leverage however, when fully adjusting for anticipated cost synergies between Virence and athenahealth, could be viewed to be around 7.5x on a run-rate basis; a level more in-line with the assigned B3 CFR. The rating is constrained by the significant risks associated with integrating the two companies and achieving sizeable cost synergies, estimated at over $150 million. Virence, which was recently spun out of GE's Healthcare division will be divesting its Workforce Management business unit in conjunction with its merger with athenahealth and has yet to become a standalone entity. Moody's notes also that from transaction close through 2019, free cash flow generation is expected to be minimal -- but is expected to reach about 1.5% of total debt over the next 12-18 months if synergy targets are met and the combined company achieves organic growth in the mid-to-high single-digit range. Delays in achieving cost cutting and revenue growth goals will likely result in a prolonged period of minimal free cash flow generation and elevated leverage levels. Competition within the healthcare IT market is fierce and the company will be up against much larger and better capitalized peers, including AllScripts, Cerner and market leader, Epic.

Support for the B3 rating is provided by the company's strong market position -- pro forma for the transaction the company is estimated to have a top 3 position within the electronic medical records market, behind Cerner and Epic, with pro forma revenues of $1,681 million as of the LTM period ended September 30, 2018. athenahealth and Virence's software and services solutions are well regarded by customers within the markets they serve and the companies have developed longstanding relationships. The strength of Virence and athenahealth's customer relationships, along with value providing, hard to replace software systems result in a very high proportion of recurring revenue to total revenue. Management estimates that nearly 90% of pro forma revenue streams are recurring in nature, consisting of contracted maintenance and subscription revenue and recurring collections from athenahealth's customer base. Accordingly, the combined company will have good visibility into future cash flows and once synergies are realized, should achieve a high quality of earnings with interest coverage, leverage and cash flow metrics in line with the B3 ratings. Further supporting the rating are favorable industry trends, within the electronic medical record and revenue cycle management markets, driven by increased health care spending, and a drive to efficiently manage the business processes of ambulatory care settings, which will buoy EBITDA growth.

The stable outlook reflects our expectation for stabilization of recent declines in EBITDA at Virence, continued organic EBITDA growth in the high single digit percent range at athenahealth resulting in an overall organic growth rate in the mid to high single digit range. Expected EBITDA growth, driven in part by cost cutting measures, in conjunction with mandatory debt repayment should enable the company to de-lever to below 8x over the next 12-18 months, and achieve free cash flow to debt of about 1.5%.

The ratings could face downward pressure if the company faces difficulty in integrating the two businesses such that leverage is not expected to be sustained below 8x over the next 12-18 months, or if EBITDA were to decline organically.

The ratings could be upgraded if the company is expected to maintain leverage below 7x and free cash flow to debt is expected to be sustained at above 5%.

Pro forma for the transaction, the combined company's liquidity is adequate considering about $60 million of costs which are anticipated to be incurred to achieve synergy targets in addition to pro forma interest expense and capital expenditures in excess of $350 million. Liquidity is supported by a $400 million senior secured revolving credit facility which will be undrawn at close, and a $125 million cash balance. The revolver contains a springing maximum net first lien leverage ratio which will be tested at the end of any quarter where utilization is 35% or above. Based on expectations for modest but positive free cash flow generation, Moody's does not anticipate that revolver borrowings will exceed this threshold over the next 12-18 months.

The principal methodology used in these ratings was Software Industry published in August 2018. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

VVC Holding Corp and athenahealth, Inc., which are expected to do business under the athenahealth brand following the acquisition transaction, are entities owned by funds affiliated with Veritas Capital. The combined company will be a leading provider of electronic data interchange, electronic medical records and revenue cycle management software and services to healthcare providers. As of the LTM period ended September 30, 2018 pro forma revenues generated by the combined companies would have been $1.681 billion. The company will be headquartered in athenahealth's existing HQ in Watertown, MA.

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 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.

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.

Stephen Morrison
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

Russell Solomon
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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