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Rating Action:

Moody's downgrades Premier Dental's (parent of Western Dental) CFR to Caa1 from B3; outlook negative

08 May 2015

Approximately $325 million of rated credit facilities affected

New York, May 08, 2015 -- Moody's Investors Service downgraded Premier Dental Services, Inc.'s ("PDS") Corporate Family Rating to Caa1 from B3, its Probability of Default Rating to Caa1-PD from B3-PD, and its senior secured bank credit facility rating to Caa1 from B3. The rating outlook is negative.

The rating action reflects the company's weak operating performance and deterioration of credit metrics beyond Moody's prior expectations. The declining operating margins are due primarily to the restoration and expansion of certain benefits for adult DentiCal coverage by the state of California in mid-2014. This has resulted in a significant payor mix shift due to the higher proportion of lower-margin patients covered by DentiCal. In addition, the higher frequency of DentiCal patient visits is also expected to continue to displace higher-paying out-of-pocket or commercial insurance customers, resulting in a lower average reimbursement rate for the company's services. The downgrade also reflects Moody's concerns related to the minimal cushion under the company's financial maintenance covenants over the next few quarters, due to recent earnings volatility and approaching step-downs. While Moody's anticipates that the sponsor will provide an equity cure over the approaching financial covenant testing periods, the downgrade reflects Moody's expectation that a waiver or an amendment may be required, if the sponsor faces any restrictions in providing additional equity infusions in order to resolve a covenant violation (equity cure) over the next 12 to 18 months.

Following is a summary of Moody's rating actions.

Premier Dental Services, Inc.:

Ratings downgraded:

Corporate Family Rating to Caa1 from B3

Probability of Default Rating to Caa1-PD from B3-PD

Senior secured revolving credit facility to Caa1 (LGD 4) from B3 (LGD 4)

Senior secured first lien term loan to Caa1 (LGD 4) from B3 (LGD 4)

The rating outlook is negative.

RATINGS RATIONALE

The company's Caa1 Corporate Family Rating reflects the company's small absolute revenue size, high financial leverage, considerable level of bad debt expense, and high geographic concentration in California, which has faced reimbursement pressures. The company's credit profile also reflects liquidity concerns related to the weak cushion under the company's credit facility financial maintenance covenants. We expect the company to continue to face near-term earnings pressure due to the lower average reimbursement rate for the company's dental services, following the expansion of adult dental coverage under DentiCal which has faced recent reimbursement cuts, and displacement of higher margin self-pay patients who pay a full fee-for-service rate out of pocket. The rating also reflects the high reliance on the ability of the company's regulated operating subsidiaries to continue to successfully upstream cash via dividend payments to service the debt held at Premier Dental Services, Inc. While highly unlikely to occur, upstream payments have the ability to become restricted under the operation of the Knox-Keene Act, the California Department of Managed Health Care ("DMHC") or the operating performance of these subsidiaries.

The negative rating outlook reflects Moody's concerns that PDS will be challenged to stabilize and improve operating performance. It also reflects Moody's expectation that the company's credit metrics will remain constrained, and that its liquidity profile will remain weak. In addition, while Moody's expects the company to obtain an equity infusion from the financial sponsor for the first quarter 2015 testing period, the absence or inability of the sponsor to implement an equity infusion in order to resolve covenant violations over the next 12 to 18 months would likely require a waiver or an amendment by the lenders.

The ratings could be downgraded if the company's operating performance or sources of liquidity deteriorate, or if for any reason Moody's becomes further concerned around the sustainability of the company's capital structure.

The ratings could be upgraded if the company's operating performance stabilizes and its liquidity profile improves. An upgrade would also require the company to reduce adjusted debt to EBITDA below 6.0 times on a sustained basis.

The principal methodology used in these ratings was Global Healthcare Service Providers published in December 2011. Other methodologies used include Loss Given Default for Speculative-Grade Non-Financial Companies in the U.S., Canada and EMEA published in June 2009. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.

Headquartered in Orange, California, Premier Dental Services, Inc. ("PDS"), and its subsidiaries and affiliates, including Western Dental Services, Inc., (collectively "Western Dental") is a leading provider of full service general, specialty and orthodontic dentistry services in the United States, and the largest provider of dentistry services in the State of California. As a regulated and licensed HMO/health plan under California's Knox-Keene Health Care Service Plan Act of 1975, and as permitted under Arizona law, Western Dental operates predominantly under the staffing model, whereby the company directly employs its dentists. As of December 31, 2014, Western Dental operated 187 dental centers throughout California, Arizona, Nevada and Texas. The company is owned by private-equity firm, New Mountain Capital, and generated total revenues of approximately $521 million for the twelve months ended December 31, 2014.

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.

Daniel Goncalves
Asst Vice President - 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

Peter H. Abdill, CFA
MD - Corporate Finance
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 downgrades Premier Dental's (parent of Western Dental) CFR to Caa1 from B3; outlook negative
No Related Data.
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