S&P: CCHN Group Holdings Inc. Assigned 'B' Corporate Credit Rating, Stable Outlook; Debt Ratings Assigned
At the same time, we assigned our 'B' issue-level rating and '3' recovery rating to Community Care Health Network LLC's proposed $248 million senior secured credit facility, consisting of a $10 million revolving credit facility and a $238 million term loan. Our '3' recovery rating indicates our expectation for meaningful (50%-70%, at the lower end of the range) recovery to lenders in the event of payment default.
CCHN Group Holdings (doing business as Matrix Medical Network) provides comprehensive health assessments and chronic care management services to customers across 37 states. The company's customers, which consist primarily of Medicare Advantage plans, contract with Matrix to provide health assessments to ensure accurate data on patient health conditions, which drives higher reimbursement to compensate plans that enroll sicker and at-risk patients. The company's health assessments are provided by its 1,200 provider network, which consists primarily of nursespractitioners. In our view, the size of this network is a key competitive advantage, as prospective new entrants would need to recreate this provider network to enter this business.
"We view the company's business as very narrowly focused, with almost all of its revenues derived from health assessments for Medicare Advantage plans," said S&P Global Ratings credit analyst Shannan Murphy. For this reason, we view regulatory risk from the U. S. Center for Medicare and Medicaid Studies (CMS) as a key credit risk, as any changes to the required frequency of health assessments or regulatory changes that increased costs to Matrix or its customers could have a meaningful impact on operating results. The company's customer base is fairly concentrated, with about half of all revenues derived from two payers; this risk is only partially offset by the company's high historical customer retention rates. While the company is also seeking to expand into the fast-growing chronic care management services, this segment currently contributes minimal revenues, and we view this space as very fragmented and intensely competitive. While Matrix is positioned as a high quality service provider, supporting premium pricing, pricing has declined over time due to its limited size and bargaining power compared to the large insurance companies that comprise its customer base. For this reason, we expect further price erosion over the next few years. Still, the company has modestly expanded its margins over time, in part by improving its scheduling efficiency and reducing fixed and variable costs.
Our stable rating outlook on Matrix reflects our view that the company is likely to grow organically at least at a mid-single-digit pace or better, reflecting growth in Medicare Advantage enrollment. It also reflects our expectation that CMS will continue to support the use of data generated from in-home health assessments to support risk adjustment, and that any regulatory changes will not impact Matrix's business model. While we expect Matrix will generate $15 million to $20 million in annual discretionary cash flow, we believe that the financial sponsor will prioritize business expansion and diversification over deleveraging, and expect leverage to be sustained between 4x-5x.
We could lower the rating if Medicare's approach to using data from health assessments becomes less favorable, resulting in a sharp reduction in demand for Matrix's services. We could also lower the rating if the company experiences increasing competitive pressures that result in customer losses and sharp declines in revenue per assessment. If revenues and revenue per assessments each declined in the low double digits (most likely as a result of severe competition that resulted in customer losses and much lower pricing), we believe margins would decline about 700 basis points and free cash flow would be very thin, resulting in a lower rating.
We view upgrade prospects as limited over the near term given that the company's business is so narrowly focused, and because we expect the company to prioritize growth over deleveraging.