DBRS Assigns Provisional Ratings to Centric Health Corporation

DBRS has today assigned an Issuer Rating of B (high) to Centric Health Corporation (Centric or the Company) and a provisional rating of B (high) to the Company’s Senior Secured 2nd Lien Notes, both with Stable trends. The Senior Secured 2nd Lien Notes have a recovery rating of RR4. The Issuer Rating reflects the high level of competition and the constantly evolving regulatory environment in the health care services industry. DBRS also recognizes risks associated with growth and the high number of related party transactions, which the Company has begun to address through recent actions. These challenges are partially offset by the favourable industry trend of higher demand for services as the population ages, the Company’s product and geographic diversification within Canada (which is not typical of the health care industry) and its improving scale in a highly fragmented market.

DBRS expects that Centric’s earnings profile could strengthen as the Company’s emphasis shifts from growth through acquisitions to integration, organic growth and cost-saving initiatives, which may be supported by the Company’s recent additions of key executives (CEO, CFO, COO and CIO) with significant experience in the health care industry. DBRS believes that revenues should continue to increase in the medium term, albeit at a slower rate than growth of over 11 times (x) since 2009, based on organic growth and opportunistic acquisitions in each segment with the exception of medical assessments. Margins within each segment should remain relatively stable absent further regulatory changes that reduce government health care funding (and specifically the price paid for Centric’s services). Margins differ greatly between Centric’s business segments, but EBITDA margins on a consolidated basis should improve modestly toward previous levels as the Company focuses on integration and improving efficiency. As such, DBRS forecasts that EBITDA should improve to the $50 million to $55 million range in the near term, increasing toward the $70 million level on an organic basis in the medium term.

In terms of financial profile, DBRS expects that the Company should remain at least stable and in a range acceptable for the current rating category subsequent to the proposed issuance of up to $200 million of Senior Secured 2nd Lien Notes. Cash flow from operations should continue to track operating income, while capex is expected to remain relatively modest in proportion to cash flow, and working capital requirements should increase as the Company grows. Free cash flow should therefore increase toward the $20 million to $30 million range within three years.

The Company has proposed the issuance of up to $200 million of Senior Secured 2nd Lien Notes, the proceeds of which, along with funds drawn on a new revolving credit facility, will be used to repay existing indebtedness (term loan and amounts drawn on Centric’s existing revolving credit facility) as well as to repay a portion of the Company’s outstanding Alaris Royalty Corporation preferred partnership units. DBRS estimates these transactions would result in pro forma debt-to-EBITDA of approximately 6.5x (approximately 5.1x excluding convertible securities) and EBITDA coverage of 2.13x. Using adjusted EBITDA as reported by the Company, debt-to-EBITDA pro forma the new issuance would be approximately 5.2x (or approximately 4.1x excluding convertible securities).

Going forward, DBRS believes that Centric has the potential to improve credit metrics, primarily through growth in EBITDA in the medium term (i.e., debt-to-EBITDA toward the 4.0x level and EBITDA coverage toward the 3.0x level), as the Company is expected to use any free cash flow to invest in growth rather than to repay debt or provide cash returns to shareholders. Should credit metrics deteriorate as a result of weaker than expected operating performance or more aggressive than expected financial management, the ratings could be pressured.

Notes:
All figures are in Canadian dollars unless otherwise noted.

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link to the right under Related Research or by contacting us at info@dbrs.com.

The applicable methodologies are Rating Companies in the Services Industry, Rating Companies in the Merchandising Industry and DBRS Recovery Ratings for Non-Investment Grade Corporate Issuers, which can be found on our website under Methodologies.