-- 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.
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
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.
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.
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
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
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.
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Corporate Credit Rating B+(prelim)/Stable/--
$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)
$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