Heartland Dental LLC Outlook Revised To New Debt Rated

Stocks and Financial Services Press Releases Thursday July 13, 2017 09:27
NEW YORK--13 Jul--S&P Global Ratings

NEW YORK (S&P Global Ratings) July 12, 2017--S&P Global Ratings today affirmed its 'B-' corporate credit rating on dental support organization Heartland Dental LLC and revised the outlook to stable from negative.

We assigned our 'B-' issue-level rating to the proposed $100 million revolving credit facility maturing 2022 and $750 million first-lien term loan maturing 2023. The recovery rating is '3' indicating expectation for meaningful (50-70%; rounded estimate: 55%) recovery in the event of a payment default.

At the same time, we assigned a 'CCC' issue-level rating to the proposed $225 million second-lien term loan maturing 2024. The recovery rating is '6' indicating expectations for negligible (0%-10%; rounded estimate: 0%) recovery in the event of a payment default.

We will withdraw our ratings on the previous capital structure at the close of the transaction.

The outlook revision to stable from negative reflects our expectation that Heartland Dental will successfully refinance its capital structure, materially extending its maturity profile and providing liquidity to support its operations and growth strategy.

The stable outlook reflects revenue growth in the low- to mid-teens, driven by an aggressive pace of opening new dental offices and increased affiliations. We expect a 200-basis-point improvement in adjusted EBITDA margin as recently opened offices mature and the company realizes increased efficiencies from investments in infrastructure.

Heartland's industry remains highly competitive, which may prevent the company from achieving margin improvements or its revenue growth targets. We could lower the ratings on Heartland should the company experience unexpected negative revenue or margin trends and liquidity becomes tight, with less than 15% headroom under its loan agreement covenant.

We could also consider a lower rating if we believe that Heartland is unlikely to generate sufficient cash flow to fund operations over the longer term. In this scenario, we would expect revenue growth in the high single digits and adjusted EBITDA margins similar to 2016 levels.

Given Heartland Dental's high leverage and aggressive growth strategy, we believe an upgrade is unlikely over the next year. We could consider a higher rating if Heartland Dental establishes a track record over several quarters of annual discretionary cash flow generation above $20 million and maintains ample liquidity. In this scenario, we would expect office-level investments and recent efficiency initiatives to result in higher-than-expected revenue and margins.

We view any deleveraging from EBITDA growth as temporary because we expect the financial sponsor to prioritize growth and shareholder returns over debt reduction.

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