S&P: WD Wolverine Holdings LLC Assigned 'B' Corporate Credit Rating, Stable Outlook; Debt Rated 'B'
At the same time, we assigned our 'B' issue-level rating to WD Wolverine Holdings LLC's proposed first-lien credit facility and assigned a 'CCC+' issue-level rating to the company's second-lien credit facility. The recovery rating on the first-lien debt is '3', indicating our expectations for meaningful (50%-70%; at the high end of the range) recovery in the event of payment default. The recovery rating on the second-lien debt is '6', indicating our expectations for negligible (0%-10%) recovery in the event of payment default.
"WD Wolverine Holdings LLC is an integrated pharmacy benefit manager (PBM) that contracts primarily with small to midsize self-insured employers, unions, municipals, and providers in the U. S.," said S&P Global Ratings credit analyst James Uko. WD Wolverine Holdings LLC currently maintains a network of approximately 67,000 retail pharmacies and wholly owned mail and specialty pharmacies nationwide. The company covers 1 million lives and processes 6 million prescriptions annually.
The PBM industry is highly fragmented, with approximately 60% of the market dominated by three competitors (Express Scripts, Optum Rx, which is owned by UnitedHealthcare, and CVS Caremark.) The next largest competitor holds approximately 6% of the market. Consolidation and market dynamics among the larger competitors have created opportunities for smaller companies such as WD Wolverine Holdings LLC to contract with underserved clients and health plan providers that wish to remain independent of ownership from larger insurance providers with PBM capabilities. Thus, despite WD Wolverine Holdings' limited market share (less than 1%) and negotiating leverage, it can still continue to successfully compete for small to midsize clients via higher more customized service levels.
Our rating outlook on WD Wolverine Holdings LLC is stable, indicating our expectation that the company will generate double-digit organic revenue growth, sustain margins in the high-single-digit to low-double-digit range, and produce positive cash flow growth. Given the company's financial sponsor ownership and the leverage layered onto the capital structure due to the recapitalization, we believe leverage will remain over 5x for the next few years as we expect the financial sponsors to favor shareholder returns over permanent debt reduction.
We could consider a lower rating if the company experiences major contract losses as a result of higher competition from larger PBMs or consolidation from larger health plans with in-house PBM capabilities. This would result in depressed margins and negative cash flows. We believe the magnitude of the deterioration necessary to trigger a lower rating would be a margin decline of more than 400 basis points.
We could consider raising the rating if the company appears likely to sustain debt to EBITDA below 5x. This could occur if the company achieved an approximately 400-basis-point improvement in margin by developing greater negotiation and pricing ability. We find this scenario unlikely given the company's growth trajectory, its scale, and its financial sponsor ownership, which we believe will favor the use of internal cash flows for shareholder returns rather than permanent debt reduction.