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