TEXT-S&P affirms Aveta 'B+' rating

Wed Mar 21, 2012 2:01pm EDT

March 21 - Overview	
     -- Aveta Inc., the leading Medicare Advantage health insurer in
Puerto Rico, is planning a recapitalization to refinance its current outstanding
loan and pay a dividend to its equity holders.	
     -- This transaction increases the company's debt leverage and limits its 	
near-term financial flexibility, but the company's key credit metrics remain 	
supportive of the rating with an adequate covenant cushion. 	
     -- As a result, we are affirming our 'B+' counterparty credit rating and 	
assigning a 'B+' rating to the new secured credit facility. 	
     -- The outlook remains stable, reflecting limited upside to the rating 	
given the company's geographic and product concentration, weak capitalization, 	
and aggressive financial policy.	
	
Rating Action	
On March 21, 2012, Standard & Poor's Ratings Services assigned its 'B+' rating 	
to Aveta Inc.'s secured credit facility, which includes a $500 million term 	
loan and $50 million senior secured revolver. At the same time, we are 	
affirming our 'B+' counterparty credit rating on Aveta Inc. The outlook 	
remains stable.	
	
Rationale	
Aveta Inc. is undertaking a dividend recapitalization, which would result in 	
an issue of $500 million of term loan and $50 million of secured revolver. The 	
company will use the proceeds from the term loan and a portion of the cash at 	
the holding company to repay the current outstanding term loan ($258 million) 	
and pay a dividend to equity holders, and for general working capital 	
purposes. The term loan will be equally divided between the two downstream 	
holding companies of Aveta Inc., namely MMM Holdings Inc. and NAMM Holdings 	
Inc. Aveta Inc. and its unregulated subsidiaries cross-guarantee both term 	
loans. 	
	
We expect the proposed term loan issue of $500 million will increase Aveta's 	
consolidated debt leverage (including operating lease obligations) to 1.6x for 	
the full-year 2012 compared with 0.9x as of year-end 2011. 	
	
Although the leverage in 2012 will likely be higher than our previous 	
expectations, it still remains supportive of the current rating on Aveta. 	
Additionally, we expect leverage will decline in 2013 to about 1.3x and reach 	
pretransaction level in 2014 because of expected continued strong operating 	
performance and the excess cash flow sweep covenant. During this time, we 	
expect fixed charge coverage (including required amortization) to remain 	
between 3x and 4x. Thus, given that the credit metrics remain supportive of 	
the current rating level, we are affirming the counterparty credit rating on 	
Aveta. 	
	
This is not the first time the company has undertaken a recapitalization 	
(previously in December 2010), wherein it added additional debt to pay 	
dividends to its private equity holders. The company used a combination of 	
debt at the holding company and dividends from operating companies to make 	
dividend payments to its equity holders. Although the increased leverage 	
remained within our tolerance for the rating, we view this as aggressive 	
financial policy. In our view, Aveta will likely do a similar dividend 	
recapitalization in the future. However, as we have seen historically, we 	
expect the company to maintain leverage within our tolerance for the rating 	
and keep capital in line with regulatory requirements at the operating 	
entities. 	
	
The rating on Aveta is also supported by the good earnings capability of its 	
operating entities. EBITDA margins have been very consistent and remained well 	
above 5% over the past couple of years. The company has a strong competitive 	
position in the Medicare Advantage (MA) market in Puerto Rico. Aveta has also 	
expanded outside Puerto Rico, by managing members on both a risk and nonrisk 	
basis for other insurance companies in California, Arizona, Missouri, 	
Tennessee, and Colorado. 	
	
However, the company still has significant concentration risk in terms of 	
geography (Puerto Rico accounts for over 75% of consolidated EBITDA) and 	
product line (MA accounts for almost 90% of total revenues). These 	
concentration risks limit the rating, since the company does not have the 	
adequate diversity to offset any adverse regulatory or competitive changes in 	
its limited market segments.	
	
Outlook	
The outlook is stable. We expect limited upside to the rating given the 	
company's geographic and product concentration, weak capitalization, and 	
aggressive financial policy. Conversely, the company's strong medical 	
management capability that is evident in its consistently strong operating 	
margins, and its leading market presence in the Puerto Rico MA market limit 	
the potential of a downgrade over the next 12 months. 	
	
However, although unlikely, we could lower the rating if the company's credit 	
metrics were to deteriorate significantly (including EBITDA margins declining 	
to below 5% or debt leverage increasing above 1.75x.)  	
	
Related Criteria And Research	
     -- Aveta Inc., Dec. 21, 2011	
     -- Analysis Of Nonlife Insurance Operating Performance, April 22, 2009	
Ratings List	
Ratings Affirmed	
	
Aveta Inc.	
 Counterparty Credit Rating	
  Local Currency                        B+/Stable/--       	
	
New Rating	
	
NAMM Holdings Inc.	
 US$250 Mil Term Loan Senior Secured    B+                 	
	
MMM Holdings Inc.	
 US$250 Mil Term Loan Senior Secured    B+                 	
	
NAMM Holdings Inc.	
MMM Holdings Inc.	
 US$50 Mil Revolver                     B+	
	
Ratings Withdrawn	
                                        To                 From	
NAMM Holdings Inc.	
MMM Holdings Inc.	
 Senior Secured                         NR                 B+	
	
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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