S&P: Cotiviti Corp. 'BB-' Credit Rating Affirmed On Refinancing; Outlook Stable; New Debt Rated 'BB'
At the same time, we assigned our 'BB' issue-level rating to the company's proposed first-lien credit facilities (which include a $100 million revolving facility expiring 2021, $250 million term loan A due 2021, and $575 million term loan B due 2023). Our recovery rating on the first-lien facilities is '2', indicating our expectation for lenders to receive substantial (70%-90%, in the lower half of the range) recovery in the event of a default.
"The rating affirmation follows Cotiviti's announcement that it intends to refinance its existing debt, which we believe is leverage neutral and does not affect our view of its credit profile," said S&P Global Ratings credit analyst Peter Deluca.
Our ratings reflect Cotiviti's leading position in the payment integrity market, strong client retention of over 90%, the contractual nature of client relationships, the increasing complexity of the industry's payment and reimbursement processes, and growth prospects from increasing health care spending from an aging population. We also factor in the company's improving credit metrics, good expense management, and strong operating margins.
Cotiviti's financial leverage improved subsequent to the IPO, mainly from the $240 million debt prepayment. Our assessment of Cotiviti's financial risk profile also reflects our view that capital allocation decisions resulting from private equity ownership could restrict the company from materially reducing its financial leverage.
The stable outlook reflects our expectation that Cotiviti's operating performance will remain robust. Over the next year, we expect the company will maintain debt to EBITDA in the 3.0x-3.5x range and at least adequate liquidity.
We could lower our ratings if we project Cotiviti's credit metrics to weaken considerably, including debt-to-EBITDA leverage nearing 5x or higher. This could occur from an unexpected event such as an IT security breach or other reputation-damaging event, unexpected customer contract losses, mergers and acquisitions, or a change in shareholder distributions leading to a higher debt burden. We estimate this could occur if EBITDA declines by approximately 25% or debt increases by about $290 million (assuming current debt and EBITDA).
We could raise our ratings if the influence of financial sponsor ownership is reduced to less than 40% and debt-to-EBITDA leverage is expected to be sustained well below 4x while liquidity stays at least adequate.