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Rating Action:

Moody's affirms Verscend's B3 CFR after Cotiviti acquisition announcement; rates new first-lien debt B3, unsecured notes Caa2; outlook stable

06 Aug 2018

Nearly $4.6 billion of newly rated debt

NOTE: On August 09, 2018, the press release was corrected as follows: The first line under Assignments in the debt list was changed to “Senior secured revolving credit facility and first-lien term loan, due 2023 and 2025, Assigned B3 (LGD3).” Revised release follows.

New York, August 06, 2018 -- Moody's Investors Service ("Moody's") affirmed healthcare-data-analytics-services provider Verscend Holding Corp.'s ("Verscend") B3 Corporate Family Rating ("CFR") and its B3-PD Probability of Default Rating ("PDR") after its announcement that it will be acquiring Cotiviti Holdings, Inc. ("Cotiviti"). Moody's also assigned B3 ratings to the company's new first-lien senior secured credit facilities, including a $300 million revolver and $3,165 million term loan, and assigned Caa2 ratings to $1,150 million of new senior unsecured notes. With backing from Veritas Capital Management, LLC ("Veritas"), Verscend plans to acquire Cotiviti for $4,917 million (including $567 million of Cotiviti net debt), refinance its own $597 million of debt, and pay $265 million of transaction fees and expenses. To finance the acquisition and refinancings, Verscend will use a small amount of cash from its balance sheet, proceeds from the new term loan and new unsecured notes, $575 million of preferred equity, and $850 million of common equity provided by Veritas. (Total sources and uses of funds for the transaction is $5,746 million. Moody's treats the preferred securities as equity.) Upon close of the transaction, Moody's will withdraw the ratings for Cotiviti Corporation (Ba3 RUR downgrade).

Moody's took the following actions on Verscend Holding Corp.:

Affirmations:

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

.... Corporate Family Rating, Affirmed B3

Assignments:

. Senior secured revolving credit facility and first-lien term loan, due 2023 and 2025, Assigned B3 (LGD3)

. Senior unsecured notes, due 2026, Assigned Caa2 (LGD5)

Outlook Actions:

....Outlook, Remains Stable

RATINGS RATIONALE

The B3 CFR reflects the exceptionally high, roughly 10 times opening Moody's-adjusted debt-to-EBITDA leverage that Verscend, with Veritas's backing, is employing to acquire Cotiviti, for an approximately 16-times multiple of Cotiviti's LTM March 31, 2018 Moody's-adjusted EBITDA. Moody's expects the leverage measure to moderate over the next eighteen months towards 8.5 times, a level still weak for the ratings category. In arriving at its credit risk assessment, Moody's considers varying degrees of success with management's very aggressive cost-reduction and synergies assumptions, which in their view augment EBITDA by about 40% of the combined companies' LTM EBITDA. Moody's is skeptical about the implications of management's plan to extract substantial synergies over a short period of time from a company that has been able to delever smartly, has shown strong revenue growth, and has expanded margins in recent years to a point where Cotiviti is already significantly more profitable than Verscend itself. While the near-term financial advantages of reducing headcount are simple to quantify, the longer-term effects are less clear and, for a well-run company, could well be deleterious.

In Moody's view, however, the aggressive structure of the transaction is offset by the operating momentum that both companies have coming into the transaction, their large, $1.1 billion combined scale, adequate liquidity, and strong competitive positions within a developing segment of a healthcare industry whose fundamentals -- favorable demographics, increasingly complex regulatory and compliance requirements, a rise in costs attributed to waste and abuse, and a shift to value-based healthcare -- will provide tailwinds. Moody's expects the combined company to realize high-single-digit percentage revenue growth, and to generate only nominal free cash flow in 2018 (assuming the realization of a portion of management's forecast synergies). Moody's anticipates that in 2019 and 2020, Verscend will generate free-cash-flow-as-a-percentage-of-debt in the low-single digits, average for Moody's universe of B3-rated credits. We note as well Veritas's own marked success with improving Verscend's operating and credit metrics in the two-plus years since it acquired Verscend from Verisk Analytics.

The combination of Verscend and Cotiviti will create a strong competitor, about one third the size of industry leader Change Healthcare, which provides truly end-to-end medical payment and claims solutions delivered through a broad set of financial, clinical, and operational IT products and services. Verscend will be a leader in prospective- and retrospective-claims-accuracy solutions, with ancillary products, contributed by legacy Verscend, in risk assessment services for Medicare Advantage insurance providers and predictive analytics for both healthcare providers and insurers. Moody's believes that the moderate amount of product and service overlap between Cotiviti and legacy Verscend, combined with a high level of customer overlap, underscores the soundness of the merger rationale, and should allow for top line and operating synergies. Given the transaction- and volume-driven nature of healthcare payments processing, the combined company should be able to realize scale efficiencies. Moody's expects the company to maintain EBITDA margins in the mid-30%s (better with strong synergy realization), solid for a services company. However, legislative risks could threaten revenue growth, as could competition.

Moody's views Verscend's liquidity as adequate, with modest free cash flows beyond 2018, and an undrawn $300 million revolving credit facility. The stable rating outlook reflects Moody's expectation that economies of scale and continued solid demand for payment integrity services will enable the company to generate upper-single-digit-percentage revenue gains and strong, stable margins. Operating growth should bring Moody's adjusted debt-to-EBITDA leverage to below 8.0 times by 2020, still high for a B3-rated credit.

The ratings could be upgraded if Verscend is able to continue to deliver healthy revenue gains while maintaining profitability, such that Moody's expects debt-to-EBITDA will be approaching 6.5 times for a prolonged period. A ratings downgrade could result if Verscend is unable to realize cost efficiencies from the integration of Cotiviti, if it experiences significant volume declines or customer losses, if free cash flow is weak, or if liquidity deteriorates.

Given the predominantly first-lien-debt composition of Verscend's capital structure, the relatively much smaller unsecured debt provides minimal ratings "cushion" for the first lien debt, whose ratings are therefore pressured downward, closer to the CFR. Under most circumstances with this similar capital structure, the first-lien debt would accordingly be rated one-notch above the CFR, while the unsecured debt would be rated two notches lower, at Caa2. However, because of Verscend's unusually levered overall capital structure -- leverage through the first lien is roughly 6.0 times, on a Moody's-adjusted basis -- and because the company is able to add more first-lien debt and is incented to pay down its preferred securities, Moody's believes that a B3 facility rating more accurately captures the risk that first-lien lenders face.

The principal methodology used in these ratings was Business and Consumer Service Industry published in October 2016. Please see the Rating 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 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.

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: 1 212 553 0376
Client Service: 1 212 553 1653

Lenny J. Ajzenman
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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