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Global Credit Research - 27 Feb 2017
Approximately $70 million of rated debt affected
New York, February 27, 2017 -- Moody's Investors Service ("Moody's") downgraded
Performant Business Services, Inc.'s ("Performant")
Corporate Family Rating ("CFR") to Caa1, from B3;
its Probability of Default rating to Caa2-PD, from Caa1-PD;
and its senior secured debt rating to Caa1, from B3. Additionally,
Moody's downgraded Performant's Speculative Grade Liquidity rating to
SGL-4, from SGL-3. The ratings outlook has
been changed to stable, from negative.
..Issuer: Performant Business Services, Inc.
.... Corporate Family Rating, Downgraded
to Caa1, from B3
.... Senior Secured Bank Credit Facilities,
maturing 2017, 2018, Downgraded to Caa1 (LGD3), from
.... Probability of Default Rating,
Downgraded to Caa2-PD, from Caa1-PD
Speculative Grade Liquidity Rating, Downgraded to SGL-4,
Outlook, Changed to Stable, from Negative
The downgrade of the CFR to Caa1 from B3 reflects weakening operating
performance which increases refinancing risk related to the March 2018
maturity of roughly $50 million of term loan debt. Performant's
liquidity will likely be strained over the next year given the unanticipated
failure of the Department of Education ("DoE") to renew its
contract with Performant and the early 2018 term loan maturity.
Moody's expects revenue contributions from the core student loan
segment, which recovers monies from defaulted student loans on behalf
of the DoE and guaranty agencies, will shrink by about 20%
in 2017, given the absence of a renewed DoE contract and shrinking
business from guaranty agencies, which since 2010 no longer originate
student loans. A modest amount of operating stability will be provided
by Performant's remaining businesses, consisting of audit
and recovery services for the Centers for Medicaid and Medicare Services
("CMS"), commercial health insurers, and Federal
and state taxation bodies.
While Moody's expects overall revenues to decline this year by less
than 10%, to about $130 million, expenses incurred
for ramping up new CMS and IRS contracts awarded in late 2016, as
well as the diminishment of high-margin DoE revenues, will
cut meaningfully into EBITDA. Given the company's small operating
scale, these factors have an outsized impact on absolute profits,
and as such Moody's expects debt-to-EBITDA leverage
could be as high as 4.5 to 5.0 times upon the March 2018
debt maturity, or more than double where Moody's estimates
the measure stood at the end of 2016. However, Performant's
net leverage measure is much more favorable than gross leverage,
given the company's significant cash balances. Additionally,
new CMS and IRS contracts represent near-term stressors,
but could be significant profit contributors in later years.
The SGL-4 speculative grade liquidity rating reflects a weak liquidity
profile. While Performant had $56 million of cash at September
30, 2016, Moody's expects free cash flow in 2017 to
be breakeven to minimally positive. The cash balance includes $7.5
million of restricted cash, which at the agent bank's discretion
can be used either for debt repayment or for supporting contract ramp-up
expenses. Performant's $11 million revolving credit
facility (undrawn) expires March 31, 2017. Absent a refinancing,
the company is unlikely to have sufficient funds to repay the roughly
$50 million term loan at the March 2018 maturity date.
The stable ratings outlook reflects Moody's expectation for declining
EBITDA and breakeven free cash flow over the next year. A ratings
upgrade could occur if Performant's debt is refinanced successfully
in 2017 in a manner that results in a sustainable capital structure and
if Moody's expects improving cash flow and profitability in 2018.
Ratings could be downgraded if the company fails to refinance the term
loan in 2017, if liquidity deteriorates, or if Moody's
expects that the falloff in student loan revenues will not reverse itself.
Performant Business Services, Inc. (Performant), a
wholly-owned subsidiary of publicly traded Performant Financial
Corporation (PFMT; Nasdaq), is a provider of audit and recovery
services for organizations in the public and private sectors. More
than two thirds of expected 2017 revenues of $130 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 October 2016. Please see the Rating
Methodologies page on www.moodys.com for a copy of this
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
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
Please see the ratings tab on the issuer/entity page on www.moodys.com
for additional regulatory disclosures for each credit rating.
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
Lenny J. Ajzenman
Associate Managing Director
Corporate Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
No Related Data.
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