New York, December 04, 2012 -- Moody's Investors Service ("Moody's") assigned B2 Corporate Family and Probability of Default ratings to Heartland Dental Care, LLC. ("Heartland"). At the same time, Moody's assigned a B1 rating to the company's proposed first lien senior secured credit facilities, including a $450 million term loan and a $100 million revolving credit facility. Moody's also assigned a Caa1 rating to the company's proposed $200 million second lien senior secured term loan. The proceeds from the senior secured credit facilities will be used, along with an additional equity contribution, to finance the acquisition of Heartland by Ontario Teachers' Pension Plan Board ("OTPP"). The outlook for the ratings is stable.
This is the first time Moody's has publicly rated Heartland Dental Care.Moody's assigned the following ratings:
$100 million 1st lien senior secured revolving credit facility, rated B1 (LGD 3, 34%)
$450 million 1st lien senior secured term loan, rated B1 (LGD 3, 34%)
$200 million 2nd lien senior secured term loan, rated Caa1 (LGD 5, 86%)
Corporate Family Rating, B2
Probability of Default Rating, B2
The outlook is stable.
The ratings are subject to review of final documantation.
"Heartland's B2 Corporate Family Rating reflects the company's small absolute size based on revenue and earnings, high financial leverage, and modest interest coverage relative to other single-B rated companies," stated Moody's Analyst, Daniel Gonçalves.
However, Heartland's credit profile benefits from its market position as the largest dental service organization in the U.S., good diversity across services and geographies, positive same store sales growth, and favorable long-term trends within the DSO industry," continued Gonçalves.
On a pro forma basis for the twelve months ended September 30, 2012, Heartland's debt to EBITDA including Moody's Standard Adjustments was high at approximately 6.2 times. However, Moody's expects the near-term reduction of financial leverage will remain largely within the company's control, depending on the pace and magnitude of the company's growth strategy. While Moody's views Heartland's base business as stable, the company is likely to pursue an aggressive acquisition and de novo growth strategy over the intermediate-term. The ratings are also constrained by the high degree of regulatory oversight, given the company's operation under a corporate integrity agreement (CIA).
The rating outlook is stable, and reflects Moody's assumption that the company's acquisition and de novo growth strategy will be financed predominantly through internally-generated cash flow. The stable outlook also reflects Moody's assumption of low-to-mid single digit same store revenue and earnings growth and Moody's expectation that the company will improve financial leverage to below 6.0 times on a Moody's adjusted basis by the end of 2013.
A downgrade could occur if Moody's come to believe that the company is unlikely to reduce leverage to below 6.0 times by the end of 2013 on a Moody's adjusted basis, if free cash flow turns negative, or if liquidity deteriorates. This could occur if Heartland experiences slower same-store sales growth, or if the company fails to reduce the recent aggressive pace of acquisition activity. The ratings could also be lowered if the company faces any material adverse legal or regulatory event.
An upgrade of the ratings is unlikely over the near-term due to the company's small absolute size, high degree of regulatory oversight, and aggressive acquisition and de novo growth strategy, which Moody's expects will limit debt repayment. Over time, if the company exhibits sales growth accompanied by a more moderate growth strategy such that adjusted leverage is sustained below 4.0 times and free cash flow to debt exceeds 8%, Moody's could upgrade the ratings.
Headquartered in Effingham, Illinois, Heartland Dental Care ("Heartland") is the largest dental support services business in the United States, both by revenue and number of offices. The company provides support staff and comprehensive business support functions under management service agreements (MSA) to its affiliated dental practices, organized as professional corporations ("PCs"). Under the MSAs, Heartland provides all services necessary for the administration of the non-clinical aspects of the dental operations, while the affiliated practices are responsible for providing dental care to patients. In addition to providing dental facilities (leased from third parties), dental supplies and support staff to the affiliated practices, Heartland also assists staff recruitment and training, quality assurance, facilities management, employee benefits administration, information systems and technology, marketing, and financial planning and reporting. As of September 30, 2012, Heartland was affiliated with 381 locally-branded dental offices, supporting 544 dentists across 21 states. During the twelve months ended September 30, 2011, the company generated net revenue of approximately $540 million.
The principal methodology used in rating Heartland Dental Care, LLC was the Global Business & Consumer Service Industry Rating Methodology Industry Methodology published in October 2010. 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.
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Daniel Goncalves Analyst Corporate Finance Group Moody'sInvestors Service, Inc.250 Greenwich StreetNew York, NY 10007 U.S.A. JOURNALISTS: 212-553-0376 SUBSCRIBERS: 212-553-1653Peter 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 StreetNew York, NY 10007 U.S.A. JOURNALISTS: 212-553-0376 SUBSCRIBERS: 212-553-1653(C) 2012 Moody's Investors Service, Inc. and/or its licensors and affiliates (collectively, "MOODY'S"). All rights reserved.
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