A full list of rating actions follows at the end of this release.
KEY RATING DRIVERS
Smaller Scale in Consolidated Industry:
Differentiated, Independent Business Model: Unlike nearly all its peers,
Stable Operations, Cash Flows: Because of their long-dated contracts and often diverse customer bases, PBMs usually have good insight into future business wins/losses and associated cash flows. Although stable and more than sufficient to cover term loan amortization, absolute cash flow dollars are somewhat light compared with peers, with FCF as a percentage of EBITDA expected to approximate 35% (>60% for its largest peer, Express Scripts).
Moderate Leverage to Decline: Term loan amortization and decent EBITDA growth are expected to contribute to de-leveraging over the ratings horizon. Gross debt/EBITDA and adjusted debt/FFO are expected to decline to 1.7x and 2.9x, respectively, by year-end 2018, from 2.4x and 3.7x at year-end 2016. Debt leverage metrics are roughly in line with those at 'BBB' rated competitor Express Scripts.
Future developments that could, individually or collectively, contribute to the consideration of an upgrade to 'BB' include:
--An expectation for gross debt/EBITDA and adjusted debt/FFO to be sustained around or below 2x and 3x, respectively;
--Successful renewal of top customer contracts in 2017 (excluding two known lost contracts), with support for growth expectations from those existing customers;
--The addition of new customers of size validating
Future developments that could, individually or collectively, contribute to the consideration of a rating downgrade to 'B+' include:
--An expectation for gross debt/EBITDA and adjusted debt/FFO to be sustained above 3x and 4x, respectively;
--The loss of top PBM customers suggesting an invalidation of
--Margin deterioration or a shift in capital allocation that pressures cash flows and/or liquidity in light of increasing term loan amortization payments.
--Soft revenue growth in 2016-2017 due to the loss of two key customers, improving in 2018-2019 under the assumption of client retention and new client wins;
--Stable margins, incrementally lower than 2015, with modest margin improvement possible in 2017-2018 due to the termination of lower-margin clients, with upside potential as the company more deeply penetrates its current customers with higher-margin services;
--Debt leverage reduction to 1.7x at YE2018 from EBITDA growth (
--No material M&A;
--Modest cash deployed for dividends (
LIQUIDITY & DEBT MATURITIES
Ample Liquidity, Stable Cash Flows: Cash on hand routinely outpaces annual debt maturities, though lower cash balances have been held since 4Q15. Liquidity is supported by stable cash generation and negative working capital, both characteristic of the PBM industry, and decently strong capital market access.
Reduced Interest Costs: The new
Manageable Debt Maturities:
The company has not maintained a revolving credit facility since 2014. All unrestricted cash is considered 'readily available'.
TWO LOST CUSTOMERS TO STALL ORGANIC GROWTH IN 2016-2017
However, two of MedImpacts top-10 customers by revenue have decided not to renew their contracts with the firm. Contract losses will affect 2016 and 2017 results, reducing top-line growth but with a less pronounced EBITDA impact. Notably, only two of
INDUSTRY EVOLUTIONS MAY FAVOR MEDIMPACT; SMALLER SCALE, BUSINESS MODEL COULD DISADVANTAGE
As the largest managed care organizations (MCOs) continue to merge, Fitch expects regional MCOs to increasingly seek to provide more customized programs for their members in order to retain and win new business.
While we expect the firm to continue to add smaller regional MCOs, the addition of a major managed care customer would provide a strong validation of
NASCENT SPECIALTY OFFERING COULD STRENGTHEN VALUE PROPOSITION
The "hub" offerings in MedDirect seem similar to those offered by other major PBMs, except without the potential or apparent conflict of interest inherent in those PBMs owning their own specialty pharmacies. Mail-order services are offered either through the above mentioned partners or through smaller independent mail-order providers. A robust specialty solution at least keeps
FULL LIST OF RATING ACTIONS
Fitch has assigned the following ratings:
--Long-Term IDR 'BB-';
--Long-Term IDR 'BB-';
--Senior secured term loan 'BB+/RR1'.
Date of Relevant Rating Committee:
Summary of Financial Statement Adjustments - Financial statement adjustments that depart materially from those contained in the published financial statements of the relevant rated entity or obligor include:
--Fitch excludes expenses related to stock-based compensation from EBITDA calculations.
--Cash paid for interest for the 2015 year-end period at
Additional information is available on www.fitchratings.com.
Criteria for Rating Non-Financial Corporates (pub.
Recovery Ratings and Notching Criteria for Non-Financial Corporate Issuers (pub.
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Source: Fitch Ratings