TEXT-S&P revises TriZetto Group outlook to negative
Overview -- U.S. health care information technology provider TriZetto Group Inc. reported third-quarter results below our expectations, with adjusted leverage above 9x. -- We are revising our outlook on TriZetto to negative from stable and affirming our 'B' corporate credit rating on the company. -- The negative outlook reflects our expectation that TriZetto's credit metrics will remain weak over the near term because of continued operational challenges. Rating Action On Jan. 8, 2013, Standard & Poor's Ratings Services revised its outlook on Denver-based health care information technology (HCIT) provider TriZetto Group Inc. to negative from stable. In addition, we affirmed our 'B' corporate credit rating on the company. The outlook revision reflects weak operating performance in recent quarters, which has elevated adjusted leverage to above 9x. Rationale The outlook revision is based on continued operating weakness that has resulted in trailing 12-month adjusted leverage of more than 9x and negative free operating cash flow (FOCF). Our expectation is that adjusted leverage will remain elevated in the near term due to continued operational challenges and accreting preferred stock, which we treat as debt. The rating on TriZetto reflects Standard & Poor's expectation that the company will maintain its "weak" business risk profile despite continued investments in its business and transition toward "full stack solution" sales (as compared to historical perpetual software license sales), which has reduced profitability in recent quarters. We believe that the company will continue to have a "highly leveraged" financial risk profile, partly because of accreting preferred stock, which we view as debt. TriZetto is an HCIT provider that develops enterprise software solutions and provides outsourcing and consulting services to health care payers and providers. The company is a relatively small participant in a market that features large health care plans with proprietary in-house solutions and large stand-alone software providers with greater financial resources. The acquisition of Gateway EDI, completed in early 2011, somewhat diversified its revenue base through penetration of the health care provider market, but this segment remains small overall despite good recent growth. However, TriZetto maintains good revenue visibility, with more than 60% of its revenues comprising recurring software maintenance contracts, outsourcing contracts, and consulting services, and it has long term relationships with its diversified customer base. TriZetto's "weak" business risk profile also reflects its acquisitive growth strategy and the ongoing revenue model transition. We expect TriZetto to continue to make tuck-in acquisitions, which we believe will target markets that are faster growth but have limited profitability in initial years. Although the company's transition from traditional upfront license and implementation sales to full stack solution sales has been modest to date, we expect it to continue to have a negative impact on profitability and cash flow in the near term. We assess the company's management and governance to be "weak." This reflects the prolonged CFO vacancy, as well as financial performance that has fallen short of guidance. TriZetto's latest 12-month revenues increased 10%, partly because of good growth in the provider segment. Although growth on the payer side has been relatively weak in recent years, we anticipate that stronger bookings and the larger backlog built up in recent quarters will continue to support revenue growth in fiscal 2013. However, TriZetto's EBITDA margin is meaningfully lower versus a year ago, due mostly to investments in its consulting business and the overall competitive pricing environment. We expect that these conditions will continue to pressure margins in fiscal 2013. We view TriZetto's financial risk profile as highly leveraged. Adjusted leverage has risen to 9.3x in the September quarter from 7.4x in the June quarter as a result of a $150 million second lien debt issuance in September and declines in EBITDA. Adjusted leverage includes approximately 2.7x turn for a sizable, accreting preferred stock which, although it has some equity-like characteristics, we treat as debt. Even though we expect some reduction in funded debt through modest amortization and an annual mandatory prepayment of up to 50% of excess cash flow, adjusted leverage is unlikely to improve meaningfully in the next 12 to 24 months unless accompanied by sustained EBITDA growth because of the accreting preferred stock. TriZetto's financial risk profile also reflects negative FOCF resulting from lower profitability, working capital spending, and higher capital expenditures in recent quarters. Liquidity We view TriZetto's liquidity as "adequate." We expect cash sources to cover uses by more than 1.2x for the next 12 months, and for net sources to be positive in the near term even with a 15% to 20% decline in projected EBITDA. Our assessment of TriZetto's liquidity profile incorporates the following expectations, assumptions, and factors: -- Cash on hand was about $118 million as of September 2012, but we expect most of the cash will be used for future acquisitions. -- The company had full availability under its $85 million revolver. -- We expect positive funds from operations (FFO) in fiscal year 2013. -- We expect capital expenditures to be in excess of $50 million in fiscal year 2013. -- There are no near-term maturities. -- The current ratings do not incorporate additional debt-financed acquisitions. Recovery analysis The company's first-lien $650 million term loan due 2018 and $85 million revolving credit facility due 2016 are rated 'B'. The '3' recovery rating on the term loan indicates our expectation for meaningful (50% to 70%) recovery in the event of payment default. The company's second-lien, $150 million term loan due 2019 is rated 'CCC+'. The '6' recovery rating indicates our expectation for negligible (0% to 10%) recovery in the event of payment default. Outlook The negative outlook reflects our expectation that the company will continue to experience weak operating results in the near term given ongoing investments and business model transition. We could lower the rating if operating performance during the next 12 months is meaningfully worse than the company's current guidance, such that FOCF remains negative or adjusted leverage exceeds the mid-9x level on a sustained basis. We could revise the outlook to stable if TriZetto can perform in line with guidance and generate sustained EBITDA and FOCF growth through successful conversion of its existing backlog. Related Criteria And Research -- Methodology: Business Risk/Financial Risk Matrix Expanded, Sept. 18, Methodology And Assumptions: 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 -- 2008 Corporate Criteria: Ratios And Adjustments, April 15, 2008 -- Use Of CreditWatch And Outlooks, Sept. 14, 2009 -- Criteria Guidelines For Recovery Ratings, Aug. 10, 2009 -- Key Credit Factors: Methodology And Assumptions On Risks In The Global High Technology Industry, Oct. 15, 2009 Issuer Ranking: Global Technology Ratings, Strongest to Weakest, Sept. 27, 2012 -- Top 10 Investor Questions For 2013: Global Technology, Dec. 5, 2012 Ratings List OUTLOOK REVISED TO NEGATIVE AND RATING AFFIRMED To From Trizetto Group Inc. Corporate credit rating B/Negative B/Stable RATINGS AFFIRMED Trizetto Group Inc. $650 mil first lien term loan due 2018 B Recovery rating 3 $85 mil revolving credit facility due 2016 B Recovery rating 3 $150 mil second lien term loan due 2019 CCC+ Recovery rating 6 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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