Approximately $360 million of debt rated
New York, April 25, 2011 -- Moody's Investors Service assigned B1 Corporate Family and Probability
of Default Ratings to Valitas Health Services, Inc. (Valitas).
Moody's also assigned a Ba3 (LGD 3, 35%) rating to
the company's proposed $360 million credit facility,
consisting of a $75 million revolver and a $285 million
term loan. Moody's understands that the proceeds of the facility,
along with $100 million of mezzanine debt (not rated by Moody's),
will be used to fund the acquisition of the equity of America Service
Group, Inc. (ASG) and refinance Valitas' existing debt.
The ratings outlook is stable.
The rating actions are subject to the conclusion of the transaction,
as proposed, and Moody's review of final documentation.
Following is a summary of Moody's actions.
Ratings assigned:
$75 million senior secured revolving credit facility expiring 2016,
Ba3 (LGD 3, 35%)
$285 million senior secured term loan due 2017, Ba3 (LGD
3, 35%)
Corporate Family Rating, B1
Probability of Default Rating, B1
RATINGS RATIONALE
"The assignment of the B1 Corporate Family Rating to Valitas reflects
our expectation that the company will focus on reducing the leverage added
in the acquisition of America Service Group," said Dean Diaz,
a Moody's Senior Credit Officer. "Valitas' B1
rating also reflects the increased scale and prominent position the combined
company will have among providers of healthcare services to correctional
facilities," continued Diaz.
The B1 rating also reflects Moody's expectation of strong cash flow generation,
characterized by minimal bad debt expense and modest capital investment
needs, that will be available for debt reduction or continued investment
in the growth of the company. However, Moody's also considered
the still significant customer concentration of the combined company and
risks associated with the integration of a transformational transaction
as the acquisition of ASG is the company's largest to date.
The stable outlook reflects Moody's expectation that the combined company
will benefit from the increased scale and ability to leverage the existing
infrastructure while implementing best practices of both companies.
Additionally, while Moody's expects cash flow generation to be negatively
impacted by the increased interest burden associated with the higher debt
load, it also believes that the company will continue to generate
sufficient free cash flow and focus on debt reduction. This should
bring leverage, including an adjustment to treat a portion of the
preferred stock as debt, below 5.0 times within 18 months
of the close of the transaction.
If the company sees growth in EBITDA from new contract opportunities or
repays debt such that debt to EBITDA is sustained below 4.0 times
and free cash flow to debt is expected to be sustained above 8%,
Moody's could upgrade the ratings.
If the company takes on additional debt to fund acquisitions or incurs
operating difficulties associated with the integration of the acquired
business or customer retention issues such that leverage were to increase
above 5.5 times on a sustained basis, Moody's could downgrade
the ratings.
For further details refer to Moody's Credit Opinion for Valitas
Health Services, Inc. on moodys.com.
This is the first time Moody's has assigned a rating to Valitas.
The principal methodology used in rating Valitas Health Services was the
Global Business & Consumer Service Industry Rating Methodology Industry
Methodology, published October 2010. Other methodologies
used include Loss Given Default for Speculative Grade Issuers in the US,
Canada, and EMEA, published June 2009 (and/or the Government-Related
Issuers methodology, published July 2010.
Valitas Health Services, Inc., through its operating
subsidiaries, is a provider of contract healthcare services to correctional
facilities owned or operated by state and local governments. The
company recognized approximately $750 million in revenue in the
year ended December 31, 2010.
REGULATORY DISCLOSURES
Information sources used to prepare the credit rating are the following:
parties involved in the ratings, parties not involved in the ratings,
public information, and confidential and proprietary Moody's
Investors Service information.
Moody's Investors Service considers the quality of information available
on the issuer or obligation satisfactory for the purposes of assigning
a credit rating.
Moody's adopts all necessary measures so that the information it uses
in assigning a credit rating is of sufficient quality and from sources
Moody's considers to be reliable including, when appropriate,
independent third-party sources. However, Moody's
is not an auditor and cannot in every instance independently verify or
validate information received in the rating process.
Please see ratings tab on the issuer/entity page on Moodys.com
for the last rating action and the rating history.
The date on which some Credit Ratings were first released goes back to
a time before Moody's Investors Service's Credit Ratings were fully digitized
and accurate data may not be available. Consequently, Moody's
Investors Service provides a date that it believes is the most reliable
and accurate based on the information that is available to it.
Please see the ratings disclosure page on our website www.moodys.com
for further information.
Please see the Credit Policy page on Moodys.com for the methodologies
used in determining ratings, further information on the meaning
of each rating category and the definition of default and recovery.
New York
Dean Diaz
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
New York
Peter H. Abdill, CFA
MD - Corporate Finance
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
Moody's Investors Service
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
Moody's assigns B1 CFR to Valitas Health Services; proposed credit facility rated Ba3; outlook is stable