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Related Issuers
Rating Action:

Moody's upgrades Golden State Buyer's CFR to B2; outlook stable

29 Jun 2020

New York, June 29, 2020 -- Moody's Investors Service ("Moody's") upgraded the ratings of Golden State Buyer, Inc. (borrowing entity of Golden State Medical Supply, Inc., collectively, "Golden State"), including the Corporate Family Rating to B2 from B3, Probability of Default Rating to B2-PD from B3-PD, first lien senior secured term loan and revolver to B1 from B2, and second lien senior secured term loan to Caa1 from Caa2. The outlook is stable.

The ratings upgrade reflects Golden State's improving credit profile supported by Moody's expectation that Golden State will maintain debt/EBITDA below 6x through 2021 with good free cash flow. EBITDA growth since the time of its leveraged buyout in June 2019 is driving debt/EBITDA down. Golden State has been benefitting from some meaningful product adds in its non-exclusive business selling to the US government (selling via Multiple Award Schedules, specifically, the Federal Supply Schedule) that also boost operating margins. While Moody's believes these opportunities are temporary, Golden State will continue to grow revenue and earnings through 2021 by adding new products to its offering to the government and winning the majority of re-compete bids for already contracted products that expire in 2020 and 2021.

Ratings upgraded:

Golden State Buyer, Inc.

Corporate Family Rating to B2 from B3

Probability of Default Rating to B2-PD from B3-PD

First lien senior secured credit facilities to B1 (LGD3) from B2 (LGD3)

Second lien senior secured term loan to Caa1 (LGD5) from Caa2 (LGD5)

Outlook action:

The outlook is stable.

RATINGS RATIONALE

The B2 Corporate Family Rating reflects Golden State's moderately high financial leverage in light of high customer concentration with the US Department of Veteran's Affairs and the Department of Defense, which account for all of its revenues. Moody's estimates that debt/EBITDA for the 12 months ended March 31, 2020 approximated 5.9x and forecasts an improvement to under 5.5x in 2021. A key constraint is contract re-bidding risk. In order to grow earnings, Golden State must compete for new and existing government contracts, as well as expand the share of generic drugs that manufacturers sell to the government through resellers. More than 20 National Contracts are up for re-bid through 2021, however, Moody's expects Golden State will re-bid and win the majority of these contracts. A large percent of revenue is derived from long-term, exclusive contracts with relatively high win-rates, resulting in lower earnings volatility as compared to generic manufacturers in non-government markets.

The stable outlook reflects Moody's view that Golden State will continue to generate good free cash flow, offset by moderately high debt/EBITDA above 5x over the next 12-18 months.

Golden State's liquidity profile will be good over the next 12 months. Golden State reported cash of $28 million at March 31, 2020, including $14 million drawn on its revolver. Moody's expects that the revolver will be repaid in full and that Golden State will generate more than $20 million in free cash flow over the next 12 months. Mandatory debt amortization is modest at $3 million per year and capital expenditures are low, typically less than $1 million per quarter. The revolver has a 7x springing maximum first lien net leverage financial covenant that is tested once borrowings exceed 35% ($14 million). The covenant steps down to 6.50x in March 2021. Moody's does not expect the company to test the covenant based on modest future borrowing expectations.

ESG considerations are material to the rating. Moody's regards the coronavirus outbreak as a social risk under Moody's ESG framework, given the substantial implications for public health and safety. The rapid and widening spread of the coronavirus outbreak, deteriorating global economic outlook, falling oil prices, and asset price declines are creating a severe and extensive credit shock across many sectors, regions and markets. The combined credit effects of these developments are unprecedented.

Beyond the outbreak, ESG considerations include Golden State's leveraged buyout in June 2019 which resulted in high financial leverage, a governance risk. Moody's believes Golden State's financial policy will be balanced to include voluntary debt repayment over time.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

The ratings could be downgraded if Moody's expects Golden State's debt/EBITDA to be sustained above 6x. Failure to successfully manage its re-bid of expiring national contracts each year could also result in a downgrade.

The ratings could be upgraded if Golden State can sustain debt/EBITDA below 4.5x while generating good free cash flow. Demonstrating new national contract adds and improving supplier concentration would also be needed.

Golden State Buyer, Inc., doing business via its operating subsidiary, Golden State Medical Supply, Inc. is a repackager and distributor of generic pharmaceuticals, primarily supplying US government agencies, such as the Department of Veteran Affairs and the Department of Defense. The company is owned by private equity sponsor Court Square Capital Partners. Reported revenue for the twelve months ended March 31, 2020 was approximately $440 million.

The principal methodology used in these ratings was Distribution & Supply Chain Services Industry published in June 2018 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1121974. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security 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.

The ratings have been disclosed to the rated entity or its designated agent(s) and issuedwith no amendment resulting from that disclosure.

These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.

At least one ESG consideration was material to the credit rating action(s) announced and described above.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

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.

Morris Borenstein
VP - Senior Credit Officer
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

Jessica Gladstone, CFA
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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MJKK and MSFJ also maintain policies and procedures to address Japanese regulatory requirements.

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