April 5, 2012 / 1:52 PM / 5 years ago

TEXT-S&P assigns Trident USA Health Services prelim 'B' rating

Overview	
     -- U.S.-based Trident USA Health Services, a provider of bedside 	
diagnostic and laboratory exams, is refinancing its existing indebtedness and 	
funding a $144 million shareholder dividend.	
     -- Pro forma for this debt issuance, adjusted debt leverage will be 	
approximately 6x. 	
     -- We are assigning our preliminary 'B' corporate credit rating to 	
Trident. We are also assigning our preliminary 'B+' issue rating and 	
preliminary '2' recovery rating to Trident's proposed $225 million first-lien 	
credit facility, and assigning a preliminary 'CCC+' issue rating and 	
preliminary '6' recovery rating to Trident's proposed $100 million second-lien 	
term loan.	
     -- Our stable rating outlook is based on our expectation that Trident 	
will continue pursuing acquisitions, limiting opportunities for stronger 	
credit protection measures. 	
	
Rating Action	
On April 5, 2012, Standard & Poor's Ratings Services assigned its preliminary 	
'B' corporate credit rating to Sparks, Md.-based Trident USA Health Services 	
LLC. Our rating outlook is stable.	
	
We assigned our preliminary 'B+' issue rating, one notch above the corporate 	
credit rating, and preliminary '2' recovery rating to Trident's proposed $225 	
million first-lien credit facility, indicating our expectation for substantial 	
(70% to 90%) recovery of principal for first-lien lenders in the event of 	
payment default. The facility consists of a $50 million revolving credit 	
facility due 2016 and a $175 million term loan due 2017.	
	
Additionally, we assigned a preliminary 'CCC+' issue rating, two notches below 	
the corporate credit rating, and our preliminary '6' recovery rating, to the 	
proposed $100 million second-lien term loan due 2017, indicating our 	
expectation for negligible (0% to 10%) recovery of principal in the event of 	
payment default. The debt is being co-issued by Trident subsidiaries MX USA 	
Inc. and Kan-Di-Ki LLC.	
	
Rationale	
Our preliminary rating on Trident reflects our assessment of the company's 	
business risk profile as "weak" and the financial risk profile as "highly 	
leveraged." We expect revenue to increase by approximately 10% per year, 	
primarily reflecting continued acquisitions and the expansion of service 	
offerings to existing and acquired customers, along with steady reimbursement 	
rates on both the federal and state levels. We expect overall EBITDA margins 	
to increase by approximately 250 basis points (over actual 2011 margins), 	
primarily driven by higher margin X-ray and ultrasound businesses. 	
	
Trident's highly leveraged financial risk profile is reflected in our 	
calculation of debt to EBITDA (pro forma for the new debt of 6.0x as of Dec. 	
31. 2011) declining to about 5.3x at the end of 2012. Discretionary cash flow 	
was below $15 million for the past two years; while we expect approximately 	
$20 million to $25 million of discretionary cash flow on an annual basis, we 	
believe the company will use the majority to fund its acquisition strategy, 	
rather than lowering debt. We do not expect any shareholder dividends.	
	
The weak business risk profile reflects our view of Trident's aggressive 	
roll-up strategy, competition, and reimbursement risk, despite offsetting 	
strong growth prospects. Trident provides mobile health care services to acute 	
health care facilities. Skilled nursing homes (SNF), assisted living 	
facilities, correctional facilities, and home health/hospice are 78%, 8%, 8%, 	
and 2% of customer revenues, respectively. Primary services include x-rays, 	
laboratory testing, and sonograms (70%, 19%, and 11% of revenues, 	
respectively). Despite its geographic and customer diversity, Medicare 	
reimbursement is an ongoing risk factor. Medicare payments to Trident are 	
roughly 85% of revenues, one-half of which are billed directly to Medicare, 	
and one-half reimbursed indirectly from health care facilities. In our 	
opinion, commercial payors, at only 11% of revenues, do not provide an offset. 	
The risk of sweeping reductions in reimbursement is somewhat mitigated by 	
dispersion, because its services are billed under various Medicare schedules, 	
codes, and components. One of these key components--transportation--varies by 	
state, as well; Trident operates in 42 states. Reimbursement trends have been 	
slightly positive over the past three years, but any reduction in 	
reimbursement of per diem patient payments by Medicare to health care 	
facilities (particularly nursing homes) could hurt Trident because Medicare 	
Part A is approximately 40% of revenues. We do note, however, that Trident has 	
not seen any effect of the 2011 Medicare nursing home rate cut in any of its 	
contract renewals since the cut was announced. Trident serves over 12,000 	
providers: Its top 500 customers account for only 39% of revenues, obviating 	
any customer concentration risk. Contractual relationships give Trident the 	
right to provide operations (at established pricing), with nor obligation or 	
exclusivity on the part of the customer.  	
	
The low barriers to entry characteristic to the industry contribute to our 	
weak business assessment. The mobile health care services industry is highly 	
fragmented, and while Trident is the only national player with materially 	
greater scale than its next-largest competitor, it has a low market share. 	
Competition is primarily from regional participants and hospitals. Acute 	
health care facilities typically outsource services because there is 	
insufficient demand per facility to economically justify maintaining X-ray 	
equipment and a technician on-site. Trident's teleradiology network provides 	
X-ray reads from board-certified radiologists with rapid turnaround time. 	
Mobile services (e.g., bedside testing) are superior to patient transport in 	
terms of lowering cost, reducing injury risk, and helping SNFs manage more 	
medically complex patients.  	
	
Trident has pursued an aggressive growth strategy in this fragmented industry, 	
acquiring 34 companies since 2003; it now has a national infrastructure with 	
eight regional offices. While Trident can reap benefits from economies of 	
scale in dispatching equipment and technicians, customer billing and 	
collection, and regulatory compliance, we have not seen unadjusted margin 	
improvements over the past two years. Still, this infrastructure gives Trident 	
a competitive advantage over smaller, less sophisticated competitors, and we 	
expect some modest improvement in 2012. Health care facility relationships 	
(typically with one point of contact responsible for the relationship) are 	
cross-selling opportunities. Much of Trident's organic growth is from 	
cross-selling sonogram and laboratory services to existing X-ray customers, 	
which resulted in a majority of customers contracting for multiple services. 	
Over the medium term, Trident wants to leverage this relationship to provide 	
additional clinical mobile services such as optometry, audiology, podiatry, 	
and dentistry. We believe it will acquire small regional participants that 	
offer these services as an additional growth initiative. We also expect 	
Trident to continue growing by expanding in existing markets and entering new 	
markets via de novo efforts and acquisitions.  	
	
Liquidity	
Trident's liquidity is "adequate" for its needs. Sources of cash likely will 	
exceed uses over the next 12 months. Relevant aspects of Trident's liquidity 	
are:	
     -- With estimated sources exceeding uses by approximately $50 million, we 	
expect coverage of uses to be over 2x for the next 12 months;	
     -- Sources of liquidity include about $5 million of balance sheet cash, 	
$40 million of discretionary cash flow, and access to a $50 million revolving 	
credit facility; 	
     -- Uses include capital expenditures of between $12 million to $15 	
million and acquisitions assumed at approximately $25 million per year, 	
although Trident could make larger acquisitions;	
     -- A 20% to 25% cushion on financial maintenance covenants; and	
     -- No significant debt maturities until 2017.	
	
Recovery analysis	
See Standard & Poor's recovery report on Trident, to be published on 	
RatingsDirect immediately following the release of this report.	
	
Outlook	
Our stable rating outlook on Trident reflects our expectation that growth 	
strategies will absorb available cash flow for debt reduction. We have not 	
forecast meaningful operating efficiencies for the next year, limiting EBITDA 	
growth. We expect credit protection measures to remain at or near current 	
levels through 2012. Given minimal reimbursement pressures (evidenced by 	
recent contract renewals at consistent pricing levels), we do not expect to 	
downgrade Trident over the coming year because of meaningfully 	
lower-than-expected revenues. However, an aggressive acquisition strategy 	
resulting in revolver drawdowns that reduce Trident's covenant cushion to 	
below 10% and impairs liquidity could lead to a downgrade. 	
	
An upgrade would be predicated on lower debt leverage of approximately 4.5x, 	
achieved through strong EBITDA growth, and our confidence that the lower debt 	
level is sustainable.	
	
Related Criteria And Research	
     -- Methodology And Assumptions: Liquidity Descriptors For Global 	
Corporate Issuers, Sept. 28, 2011	
     -- Criteria Guidelines For Recovery Ratings, Aug. 10, 2009	
     -- Business Risk/Financial Risk Matrix Expanded, May 27, 2009	
     -- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008	
	
Ratings List	
	
New Ratings	
Trident USA Health Services, LLC	
 Corporate Credit Rating                B(prelim)/Stable/--	
	
MX USA Inc.	
Kan-Di-Ki LLC	
 $50M first-lien revolver due 2016      B+(prelim)	
   Recovery Rating                      2(prelim)	
 $175M term loan due 2017               B+(prelim)	
   Recovery Rating                      2(prelim)	
 $100M second-lien term loan due 2017   CCC+(prelim)	
   Recovery Rating                      6(prelim)	
	
Complete ratings information is available to subscribers of RatingsDirect on 	
the Global Credit Portal at www.globalcreditportal.com. All ratings affected 	
by this rating action can be found on Standard & Poor's public Web site at 	
www.standardandpoors.com. Use the Ratings search box located in the left 	
column.

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