TEXT-S&P rates Air Medical Group Holdings debt 'B'

Wed Nov 28, 2012 10:02am EST

Overview
     -- U.S. based emergency air transport provider Air Medical is acquiring 
Reach Medical Holdings LLC, a smaller competitor in a debt-financed 
transaction.
     -- Our expectation for debt to EBITDA of about 5x for 2012 is largely 
unchanged, despite additional debt. 
     -- We are affirming our 'B' corporate credit rating and 'B' senior 
secured ratings, and assigning our 'B' senior secured rating to two new senior 
secured issues, a $205 million term loan B maturing 2018 and a $40 million 
term loan maturing 2015. The recovery rating is '4'.
     -- The stable outlook reflects our expectation that leverage and cash 
flow, which are subject to variation caused by weather, unpredictable demand, 
and payor patterns, will remain consistent with our highly leveraged financial 
profile, i.e., debt to EBITDA will be about 5x and cash flows will be modestly 
positive.
Rating Action
On Nov. 28, 2012, Standard & Poor's Ratings Services affirmed its 'B' 
corporate credit and senior secured ratings on Lewisville, Texas-based Air 
Medical Group Holdings. At the same time, we assigned our 'B' senior secured 
rating to two new senior secured issues, a $205 million term loan B maturing 
2018 and a $40 million term loan maturing 2015 The recovery rating is '4'. The 
outlook is stable.

Rationale
Standard & Poor's Ratings Services' ratings on Lewisville, Texas-based Air 
Medical Group Holdings continues to reflect a "highly leveraged" financial 
profile following the Reach transaction, primarily because of a sustained 
debt-to-EBITDA metric of about 5x, and modest expectations of free cash flow. 
The company's "weak" business profile is unchanged, despite the expansion of 
geographic presence provided by the Reach transaction, as its portfolio is 
dominated by its narrow focus on emergency air transport.

We expect reported revenue growth will slow to the mid-single digits in 2013. 
Like 2012, we expect organic growth to be about flat, and growth to stem from 
increased volume from new community bases. We expect neutral-to-positive 
third-party reimbursement rates. Reflecting a stronger payor mix from recent 
expansion, EBITDA margins have strengthened recently, and we expect Air 
Medical to largely sustain these higher margins. Still, transport volumes can 
suffer from factors beyond the company's control, specifically weather, and 
given the emergency nature of the service, the company is subject to varying 
levels of uncompensated care. Expenses are largely fixed in nature and are 
rising as Air Medical opens new bases, introducing a measure of volatility to 
quarterly EBITDA generation. Year-to-date, revenues increased 25% as of 
September 2012, reflecting volume growth from new bases as same-base 
transports were about flat. Adjusted EBITDA margins are about 30% for the past 
nine months. Air Medical expanded rapidly through 2012, increasing its bases 
by 19 to a total of 182, requiring high levels of capital spending on 
aircraft, which absorbed free cash flow. Even though we expect the company to 
slow the rate of base expansion in 2013, we believe Air Medical remains 
committed to growing its geographic presence. Capital spending, which has been 
at levels that absorbed most free cash flow, will remain elevated in 2013, but 
we expect EBITDA expansion to result in modest levels of free cash flow. We 
expect the company to deploy cash to support its growth strategies rather than 
reduce debt. Debt leverage will gradually decrease in our view, primarily as a 
result of stronger EBITDA generation, and could drop below 5x by the end of 
2013. However, fluctuations in earnings could disrupt this leverage reduction 
trajectory, supporting our financial profile assessment of highly leveraged.

We view the company's business risk as "weak," given its narrow focus on 
emergency air transportation. We expect Air Medical to moderately increase 
EBITDA over the next 12 months as it builds new bases and increases its 
commercial reimbursement rates, but its limited size and diversity may 
challenge its ability to easily absorb operating setbacks. The company is 
exposed to reimbursement risk from third-party payors and, given the emergency 
nature of the service, to uncollectible copays and self-pay accounts. Although 
Air Medical (and the industry) has been able to secure significant annual 
increases from commercial payors, it is uncertain if that will continue, owing 
to health care cost-cutting pressure. Air Medical is generally an 
out-of-network health care provider and, prospectively, could be pressured to 
sign contracts at lower rates with large national or regional networks. 
Because commercial rates are substantially higher than Medicare rates, modest 
changes to commercial rates could severely hurt earnings and cash flow. 
Although the company is subject to competition in a fragmented market, its 
relationships with referral sources and hospitals are a primary barrier to 
entry.

Liquidity
We assess Air Medical's liquidity profile as "adequate," with sources of cash 
likely to exceed uses for the next 12 to 24 months. Cash sources include a 
$100 million asset-based lending (ABL) revolver, a modest cash balance, and 
our expectation of about $100 million of funds from operations in 2013. Uses 
of cash include capital spending of about $40 million and capital lease 
amortization of about $20 million. Our assessment incorporates the following 
expectations:
     -- We expect coverage of uses to exceed 2x for the next two years.
     -- We expect net sources to be positive, even with a 15% decline in 
EBITDA.
     -- The company is subject to some volatility in earnings and cash flow, 
which accounts for an adequate liquidity assessment despite strong coverage 
levels. 

The ABL is subject to a borrowing base coverage covenant, and is subject to a 
fixed-charge coverage covenant if availability is less than either $15 million 
or 15% of the borrowing base.  We expect cushions to remain over 15%, even 
with some volatility of quarterly earnings.  The banks allow for an add-back 
of charges taken to increase accounts receivable reserves in the second half 
of 2012, preserving some cushion.

Recovery analysis
For the latest complete recovery analysis, see Standard & Poor's recovery 
report on Air Medical, to be published as soon as possible on RatingsDirect 
following this release.

Outlook
Our stable rating outlook reflects our expectations that Air Medical will 
manage its expansion plans as we had expected and sustain current operating 
trends such that debt leverage remains at about 5x and cash flow is modestly 
positive. The rating includes tolerance for some volatility around our base 
case because of external factors such as weather and uncompensated care. 

We could raise ratings if the company sustains revenue and earnings growth so 
that debt-leverage, adjusted for operating leases, approaches 4.5x and free 
cash flow becomes more robust. At current debt levels, Air Medical would 
achieve these credit measures if EBITDA expands by about 15% and stays at that 
level. We could lower the ratings if liquidity becomes constrained such that 
revolver availability and cash on hand fall below $10 million. This could 
result from drastic changes in either reimbursement (likely commercial), FAA 
regulations that increase costs, or overly rapid expansion.

Related Criteria And Research
     -- Business Risk/Financial Risk Matrix Expanded, Sept. 18, 2012
     -- Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011
     -- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008
     -- 2008 Corporate Criteria: Rating Each Issue, April 15, 2008 

Ratings List
Air Medical Group Holdings

Ratings Affirmed

 Corporate Credit Rating                B/Stable/--        
 
Senior Secured                          B                  
  Recovery Rating                       4                  4

New Rating
Senior Secured
  $205 mil bank loan due 2018           B                  
   Recovery Rating                      4                  
  $40 mil bank loan due 2015            B                  
   Recovery Rating                      4                  

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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