TEXT-S&P assigns MModal prelim 'B+' rating

Mon Aug 6, 2012 2:36pm EDT

Overview
     -- One Equity Partners is acquiring U.S. clinical documentation solutions 
provider MModal Inc. for $1.1 billion.
     -- We are assigning our preliminary 'B+' corporate credit rating to 
MModal and preliminary issue and preliminary recovery ratings to its new 
senior secured and unsecured debt.
     -- The stable rating outlook reflects our view that the company's highly 
recurring revenue base and diversified customer base will continue to support 
consistent and improving revenue generation and profitability.

Rating Action
On Aug. 6, 2012, Standard & Poor's Ratings Services assigned its preliminary 
'B+' corporate credit rating to Franklin, Tenn.-based MModal Inc. The
outlook is stable.

We also assigned a preliminary 'BB-' issue-level ratings and preliminary '2' 
recovery ratings to MModal's proposed $515 million senior secured credit 
facilities, which consist of a $75 million revolving credit facility due 2017 
and a $440 million term loan due 2019. The preliminary '2' recovery rating 
indicates our expectations for substantial (70%-90%) recovery in the event of 
payment default.  

Additionally, we assigned a preliminary 'B-' issue-level rating and a 
preliminary '6' recovery rating to the company's proposed $250 million senior 
unsecured notes due 2020. The preliminary '6' recovery rating indicates our 
expectations for negligible (0%-10%) recovery in the event of payment default. 
 

MModal intends to use the debt proceeds, along with $447 million of equity 
contribution of One Equity Partners, to repay existing debt and to fund the 
leveraged buyout of the company.

Rationale
The ratings on MModal reflect our view that an aggressive financial profile 
following its LBO is partly offset by an increasing adoption of technology for 
clinical documentation, a recurring revenue base, high renewal rates, and a 
diversified customer base. We view MModal's business risk profile as "weak" as 
it has a narrow focus on the generally fragmented U.S. clinical documentation 
industry, which includes a more diversified director competitor with greater 
financial resources. We view the company's financial risk profile as 
"aggressive," with pro forma adjusted debt-to-EBITDA at 5.3x at closing of the 
LBO transaction, which is likely to decline to about 5x in the near term.  

MModal is a leading provider of clinical narrative capture services, speech 
and natural language understanding technology, and clinical documentation 
workflow solutions to the U.S. health care industry.

MModal competes in the outsourced transcription market, which accounted for 
about 35% of the $11.8 billion U.S. clinical documentation industry in 2011. 
We expect the outsourced transcription market is expected to experience 
high-single-digit percentage annual growth rate through 2014, as the medical 
industry is experiencing significant cost pressures and outsourcing of the 
medical transcription service allows health care providers to capture some 
cost savings. Additional tailwind for the outsourced medical transcription 
market includes regulatory requirements incentivizing the adoption of 
electronic health records (EHRs) for the improvement of documentation 
efficiency, necessitating quick turns of medical transcription services that 
cannot be efficiently provided in-house. MModal, equipped with automated 
speech recognition (ASR) technology, could help address the growing needs of 
health care providers to help them become more efficient operators.

Despite the positive industry trends, we view MModal's business risk profile 
as weak, reflecting a leading but still moderate position in the fragmented 
U.S. outsourced medical transcription market and its narrow focus. The company 
also competes with Nuance Communications, a larger company with a more 
diversified business profile and greater financial resources.  

Through internal growth and successful acquisitions, MModal was able to grow 
its revenues to $450 million in the 12 months ended March 31, 2012, from $354 
million in 2009. Its installed customer base is large, including approximately 
3,850 hospitals and clinics; about 850 physician practices; and about 200,000 
physicians and leading EHR application providers and medical transcription 
organization. Customer concentration risk is relatively low as no customer 
represents more than 6.8% of total revenues and the top 10 customers represent 
about 24% of total revenues in 2011. The company's revenue base is highly 
recurring given its 97% client retention rate and fairly stable volumes, 
providing revenue visibility. Adjusted EBITDA margin grew to the mid-20% area 
in the 12 months ended March 31, 2012, from the mid-teens in 2009, as 
technological automation, especially ASR, and a rise in offshore capabilities 
have substantially decreased the cost of production. We expect revenue growth 
for MModal in line with the expected high-single-digit growth for the U.S. 
outsourced transcription market. We also expect EBITDA margins to improve to 
the mid- to high-20% over the next two years, as more of their process uses 
technology and offshore capabilities.

MModal will have an aggressive financial profile following the transaction, 
with pro forma adjusted leverage of 5.3x at close. We expect continued revenue 
growth and EBITDA margin improvements, leading to adjusted leverage to the 5x 
area over the next year. The company has positive operating cash flow 
characteristics, despite the majority of its cash collection occurring after 
services are provided. Capital expenditures requirements are low and we expect 
free operating cash flow (FOCF) of around 6% of total adjusted debt. 

Liquidity
We view MModal's liquidity as "adequate," with sources of cash likely to 
exceed uses for the next 12 to 24 months. Cash sources include cash balances 
at close of about $16 million, but full availability under the $75 million 
revolving credit facility and positive FOCF generation provide additional 
liquidity. Cash uses include annual capital spending of about 5% of total 
revenues, investment in working capital, and minimal annual debt amortization 
payments on the company's term loan. 

Additional relevant factors of MModal's liquidity, in our view, are as follows:
     -- We expect sources of liquidity will cover uses by 1.2x or more and 
that net sources would be positive, even with a 20% drop in EBITDA; and
     -- We expect the senior secured credit facility to contain a minimum of 
30% EBITDA cushion on its total net leverage financial maintenance covenant at 
close.

Outlook
The outlook is stable, reflecting our view that the company's highly recurring 
revenue base and diversified customer base will continue to support consistent 
and improving revenue generation and profitability, leading to modest leverage 
declines over the near term. An ownership structure that we believe precludes 
material and sustained reduction in debt currently limits the potential for an 
upgrade.  

We could lower the rating if competitive pressure intensifies, leading to 
significantly lower-than-expected revenue growth or a deterioration in EBITDA 
margins, and leverage increasing to and sustained at the mid-5x level. 

Related Criteria And Research
     -- Industry Economic Outlook: Despite Economic Headwinds, Global 
Technology Shows Balanced Ratings Trend, July 9, 2012
     -- Issuer Ranking: Global Technology Ratings, Strongest To Weakest, June 
29, 2012
     -- Performance For U.S. Semiconductor Equipment Makers Has Been Volatile, 
But Ratings Remain Stable, June 11, 2012
     -- Top 10 Investor Questions: How Will The Global Technology Industry 
Fare Amid An Economy In Flux?, April 26, 2012
     -- Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011
     -- Key Credit Factors: Methodology And Assumptions On Risks In The Global 
High Technology Industry, Oct. 15, 2009
     -- Criteria Methodology: Business Risk/Financial Risk Matrix Expanded, 
May 27, 2009
     -- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008

Ratings List

New Rating

MModal, Inc
 Corporate Credit Rating                B+(prelim)/Stable/--       
 Senior Secured                        
  $75 mil revolving cred fac due 2017   BB-(prelim)
   Recovery Rating                      2(prelim)
  $440 mil term loan due 2019           BB-(prelim)
   Recovery Rating                      2(prelim)
 Senior Unsecured                       
  $250 mil nts due 2020                 B-(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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