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.