-- Bolingbrook, Ill.-based outpatient physical therapy provider ATI
Holdings Inc. is being acquired by KRG Capital Partners (KRG) in a leveraged
buyout. for $770 million.
-- ATI plans to issue a $335 million secured credit facility and $160
million of mezzanine debt to partly finance the acquisition, resulting in very
high pro forma leverage of about 7.0x by 2013.
-- We are assigning a 'B' corporate credit rating to the company.
-- Our stable outlook reflects our expectation that EBITDA will expand as
a result of the company's growth strategy supporting some improvement in
leverage and modest free operating cash flow (FOCF).
On Jan. 11, 2013, Standard & Poor's Ratings Services assigned a 'B' corporate
credit rating to ATI Holdings Inc. The outlook is stable based on our
expectation of solid double-digit revenue growth and steady margins, although
we expect FOCF to remain thin.
We also assigned a 'B+' issue level rating on the company's $335 million
senior secured credit facility that comprises of a $50 million revolver that
expires in 2019 and a $285 million term loan B that expires in 2020. The
recovery rating is a '2', indicating substantial (70% to 90%) recovery in the
event of a principal payment default. The company is also raising $160 million
of mezzanine notes, which we do not rate.
The ratings on ATI Holdings Inc. reflect the company's "vulnerable" business
risk profile, primarily reflecting low barriers to entry and economic
cyclicality, and a "highly leveraged" financial risk profile, based on
adjusted leverage that exceeds 8.0x at inception with a moderate drop to 7.0x
by 2013. In our opinion, ATI's ambitious growth strategy will support
double-digit revenue growth in 2012 and 2013, but will result in slim FOCF
over the next 12 months. ATI provides physical therapy and occupational
therapy on an outpatient basis, operating 188 clinics across Delaware,
Illinois, Maryland, Ohio, Pennsylvania, and Wisconsin.
We expect the company to maintain existing margins over the near to medium
term. Margins in 2012 reflect a 600-basis-point contraction from its peak,
stemming from a 30% Illinois workers' compensation rate cut that was effective
Our double-digit revenue growth assumptions primarily incorporate an
expectation for increased clinic visits for 2012 and 2013, offset by declining
revenue per visit for 2012. ATI reported year-to-date double-digit revenue
growth for the nine months ended Sept. 30, 2012. In addition to
mid-single-digit same-store visit growth for clinics acquired/opened prior to
2010 and 2011, we expect 62 added clinics from recent acquisitions and de novo
clinic openings in 2012 and an additional 26 clinic openings in 2013.
Combined, we expect over 20% growth in visits in 2013.
Following a decline in revenue per visit in 2012 because of the late 2011
Illinois workers compensation rate cut, we expect modest growth in 2013
stemming from better pricing from commercial payors, as the company seeks to
expand this payor mix. However, we expect revenue per visit will suffer
modestly over time, as the company diversifies away from its geographic
concentration in the Midwest region. We expect EBITDA margins, which dropped
significantly from its peak in 2011 because of the Illinois worker's
compensation cut, to remain at current levels.
We expect the company's ongoing investment in its portfolio of clinics to
absorb the majority of operating cash in 2012 and 2013. As a result, we expect
FOCF to remain thin over the next 12 months.
We view ATI's financial risk profile as highly leveraged following the
acquisition by KRG. We expect adjusted leverage after the close to be above
8.0x that excludes pro forma adjustments for acquisitions and funds from
operations (FFO) to debt to be below 10%. We expect EBITDA growth and minimal
debt repayment to push leverage down to about 7.0x by 2013. FFO to debt will
still remain thin, supportive of credit metrics of a highly leveraged
financial risk profile. ATI's sponsor ownership is also a factor in the
company's financial risk.
ATI's vulnerable business risk profile reflects its concentrated geographic
presence, ambitious growth strategies, vulnerability to economic cycles, and
low barriers to entry. The company operates in six states, with 58% of its
revenues derived from one state. The company's business risk also reflects its
susceptibility to reimbursement from third-party payors. ATI's concentration
of revenues in Illinois coupled with the state implementing a rate cut in
workers compensation has hurt EBITDA margins for 2012. Despite this cut, we
view ATI's payor mix as somewhat stronger than peers, with 33% and 52% of
revenues, respectively, from higher-paying workers' compensation and
commercial payors. The balance is from Medicare and Medicaid. Third-party
payors have generally supported the lower-cost therapies and positive
treatment outcomes stemming from physical therapy, leading to relatively
stable reimbursement. Nevertheless, risk for rate reductions still exists.
ATI's aggressive growth strategy of expanding its presence in new geographical
areas should gradually mitigate revenue concentration in one state and
diversify its payor mix. Although the strategy also exposes the company to
integration risks that are common in expanding into new markets via de-novo
clinics and acquisitions, ATI has a good track record. Past acquisitions and
de-novo clinic openings have contributed to EBITDA growth, through successful
integration on the company's scalable IT billing and time-management platforms.
We believe ATI's concentration in Midwest manufacturing exposes the company to
economic cycles that affect employment and employee-health benefits.
Unemployment has correlated to consumer deferrals in elective surgeries that
spur postsurgery physical therapy. Despite this risk, outpatient physical
therapy is a growing business, with annual growth of about 8% since 2006,
benefiting from an increase in mid-single-digit growth in orthopedic surgeries
according to IBISWorld and American Hospital Assn., respectively. The industry
benefits from heightened demand from an aging population and increases in
sports and work-related joint and musculoskeletal injuries. The highly
fragmented nature of the industry also reflects the company's business risk.
There are only three national participants and limited regional participants
(including ATI) that account for less than 4% of the market.
ATI's liquidity is "adequate," with sources of cash likely to exceed uses for
the next 12 to 24 months. Our assessment of ATI's liquidity includes the
following expectations and assumptions:
-- We expect sources to cover uses by at least 1.2x or more for the next
-- Sources include our expectation of nominal cash reserves in 2012 and
2013 and full availability on its $50 million revolver. We expect limited free
operating cash flow, as we expect working capital to be a use of cash because
of a slight increase in days sales outstanding and the company's investment in
-- Uses include our expectation of capital expenditures of about $18
million, which includes de-novo clinic openings and required debt amortization
payment of about $3 million.
-- We expect net sources to be positive, even if EBITDA declines 15%.
-- ATI would unlikely be able to absorb low-probability shocks without
incurring more debt.
-- We expect cushion on debt covenants of about 25%; however, covenant
step-downs begin in the fourth quarter of 2013, which may erode this cushion
without adequate EBITDA growth.
-- ATI will not have any debt maturities until 2018, when its revolver
For the complete recovery analysis, please see the recovery report on ATI
Holdings, to be published as soon as possible on RatingsDirect following this
The rating outlook is stable, based on our expectation of solid double-digit
revenue growth and steady margins, although we expect FOCF to remain thin. We
expect ATI to expand EBITDA generation in 2013, supporting a modest fall in
leverage. We expect growth in de novo clinics to be funded internally. We do
not believe a higher rating is likely in the near to medium term, given our
expectation that the company will continue to invest in growth and operate
with a highly leveraged financial risk profile.
We could lower the rating if anticipated EBITDA growth is delayed or less than
we expect. This could result from poor sites for new clinics that do not
generate the same level of visits, or another reimbursement cut in a large
state. Such a scenario would cause loan covenant cushions to fall below 10%.
This could occur if there was close to a 15% decline in EBITDA.
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
New Rating; Outlook Action
ATI Holdings Inc.
Corporate Credit Rating B/Stable/--
US$285 mil term bank ln due 2020 B+
Recovery Rating 2
US$50 mil revolving bank ln due 2019 B+
Recovery Rating 2
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