March 21 - Overview -- Aveta Inc., the leading Medicare Advantage health insurer in Puerto Rico, is planning a recapitalization to refinance its current outstanding loan and pay a dividend to its equity holders. -- This transaction increases the company's debt leverage and limits its near-term financial flexibility, but the company's key credit metrics remain supportive of the rating with an adequate covenant cushion. -- As a result, we are affirming our 'B+' counterparty credit rating and assigning a 'B+' rating to the new secured credit facility. -- The outlook remains stable, reflecting limited upside to the rating given the company's geographic and product concentration, weak capitalization, and aggressive financial policy. Rating Action On March 21, 2012, Standard & Poor's Ratings Services assigned its 'B+' rating to Aveta Inc.'s secured credit facility, which includes a $500 million term loan and $50 million senior secured revolver. At the same time, we are affirming our 'B+' counterparty credit rating on Aveta Inc. The outlook remains stable. Rationale Aveta Inc. is undertaking a dividend recapitalization, which would result in an issue of $500 million of term loan and $50 million of secured revolver. The company will use the proceeds from the term loan and a portion of the cash at the holding company to repay the current outstanding term loan ($258 million) and pay a dividend to equity holders, and for general working capital purposes. The term loan will be equally divided between the two downstream holding companies of Aveta Inc., namely MMM Holdings Inc. and NAMM Holdings Inc. Aveta Inc. and its unregulated subsidiaries cross-guarantee both term loans. We expect the proposed term loan issue of $500 million will increase Aveta's consolidated debt leverage (including operating lease obligations) to 1.6x for the full-year 2012 compared with 0.9x as of year-end 2011. Although the leverage in 2012 will likely be higher than our previous expectations, it still remains supportive of the current rating on Aveta. Additionally, we expect leverage will decline in 2013 to about 1.3x and reach pretransaction level in 2014 because of expected continued strong operating performance and the excess cash flow sweep covenant. During this time, we expect fixed charge coverage (including required amortization) to remain between 3x and 4x. Thus, given that the credit metrics remain supportive of the current rating level, we are affirming the counterparty credit rating on Aveta. This is not the first time the company has undertaken a recapitalization (previously in December 2010), wherein it added additional debt to pay dividends to its private equity holders. The company used a combination of debt at the holding company and dividends from operating companies to make dividend payments to its equity holders. Although the increased leverage remained within our tolerance for the rating, we view this as aggressive financial policy. In our view, Aveta will likely do a similar dividend recapitalization in the future. However, as we have seen historically, we expect the company to maintain leverage within our tolerance for the rating and keep capital in line with regulatory requirements at the operating entities. The rating on Aveta is also supported by the good earnings capability of its operating entities. EBITDA margins have been very consistent and remained well above 5% over the past couple of years. The company has a strong competitive position in the Medicare Advantage (MA) market in Puerto Rico. Aveta has also expanded outside Puerto Rico, by managing members on both a risk and nonrisk basis for other insurance companies in California, Arizona, Missouri, Tennessee, and Colorado. However, the company still has significant concentration risk in terms of geography (Puerto Rico accounts for over 75% of consolidated EBITDA) and product line (MA accounts for almost 90% of total revenues). These concentration risks limit the rating, since the company does not have the adequate diversity to offset any adverse regulatory or competitive changes in its limited market segments. Outlook The outlook is stable. We expect limited upside to the rating given the company's geographic and product concentration, weak capitalization, and aggressive financial policy. Conversely, the company's strong medical management capability that is evident in its consistently strong operating margins, and its leading market presence in the Puerto Rico MA market limit the potential of a downgrade over the next 12 months. However, although unlikely, we could lower the rating if the company's credit metrics were to deteriorate significantly (including EBITDA margins declining to below 5% or debt leverage increasing above 1.75x.) Related Criteria And Research -- Aveta Inc., Dec. 21, 2011 -- Analysis Of Nonlife Insurance Operating Performance, April 22, 2009 Ratings List Ratings Affirmed Aveta Inc. Counterparty Credit Rating Local Currency B+/Stable/-- New Rating NAMM Holdings Inc. US$250 Mil Term Loan Senior Secured B+ MMM Holdings Inc. US$250 Mil Term Loan Senior Secured B+ NAMM Holdings Inc. MMM Holdings Inc. US$50 Mil Revolver B+ Ratings Withdrawn To From NAMM Holdings Inc. MMM Holdings Inc. Senior Secured NR B+ 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. 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