S&P: York Risk Services Group 'B-' Rating Affirmed; Outlook Stable
We are also affirming our 'B-' debt ratings on York's $100 million revolver and $615 million term loan. The recovery ratings on these issues remain '3', indicating that lenders could expect a meaningful (50%-70%) recovery (in the lower half of the range) in the event of payment default. In addition, we affirmed our 'CCC' debt rating on York's $315 million senior unsecured notes. The recovery rating on this issue remains '6', indicating that lenders could expect negligible (0%-10%) recovery in the event of payment default.
"The 'B-' rating on York is based on the company's business underperformance versus our expectations since our rating assignment in 2014 and its elevated leverage metrics," said S&P Global Ratings credit analyst James Sung. York Risk Services, a leading third-party administrator and managed care provider for workers' compensation and property/casualty insurance, grew rapidly through organic and acquisitive growth during the past several years. However, we believe this growth contributed to its execution and integration issues in 2015 and early 2016 (leading to our downgrade in May 2016). York also lost several sizable clients in 2014 and 2015, which created revenue and operating cost headwinds for 2016. However, we believe the company has stabilized somewhat through the first half of 2016, as it reported modest low single-digit revenue growth and EBITDA improvement. The company recently hired a new chief financial officer with an operation-focused background.
The stable outlook on York reflects our view that the company will continue to focus on improving revenue growth and creating operational efficiencies throughout the business. We expect leverage and coverage metrics to remain weak and do not expect a change in financial policy. We expect adjusted debt-to-EBITDA of 9.0x-10.0x in 2016 and 8.5x-9.0x in 2017 and EBITDA interest coverage of 1.5x-2.0x in 2016-2017.
We would consider a downgrade in the next 12 months if the company's business deteriorates further such that the capital structure becomes unsustainable. The downgrade scenario could include significant key business losses, higher-than-expected operating costs, or acquisition/integration issues. In addition, a downgrade could be triggered if the debt-to-EBITDA ratio deteriorates further and EBITDA interest coverage falls below 1.5x, or if the company's liquidity becomes constrained such that liquidity sources fail to cover at least 1.2x of required liquidity uses.
Although we believe this is unlikely in the next 12 months, any upside would depend on a less-aggressive financial policy as reflected by a stronger commitment to deleveraging. Key financial targets include lower sustainable leverage (below 7x) and stronger EBITDA coverage (meaningfully above 2x).