2012年10月18日 / 下午4点50分 / 5 年前

TEXT-S&P rates Premier Dental

Overview
     -- Orange, Calif.-based Premier Dental Services Inc. is being acquired by 
New Mountain Partners III L.P. for $550 million including the repayment of 
Premier's existing debt.
     -- Pro forma for Premier's new debt, lease-adjusted leverage is 5.2x.
     -- We are assigning Premier and the company's Western Dental Services 
Inc. subsidiary our 'B' corporate credit rating.
     -- We are also assigning Premier's proposed $275 million secured term 
loan and $25 million revolving credit facility our 'B' credit rating with a 
recovery rating of '3'.
     -- Our stable outlook reflects our expectation for low-single-digit 
annual EBITDA growth and a very gradual decline in debt leverage over the 
medium term.
 
Rating Action
On Oct. 18, 2012, Standard & Poor's Ratings Services assigned Orange, 
Calif.-based Premier Dental Services Inc. and its Western Dental Services Inc. 
subsidiary its 'B' corporate credit rating. The rating outlook is stable.

At the same time, we assigned Premier's proposed $275 million secured term 
loan and $25 million revolving credit facility our 'B' credit rating (the same 
as the corporate credit rating) with a recovery rating of '3', indicating our 
expectation for meaningful (50% to 70%) recovery of principal in the event of 
payment default.

Rationale
Our rating on Premier Dental Services Inc. reflects its "vulnerable" business 
risk profile (according to our criteria), characterized by Premier's narrow 
business focus, geographic concentration, and unfavorable payor mix relative 
to other U.S. dental service providers. Pro forma lease-adjusted debt to 
EBITDA for the 12 months ended June 30, 2012, is 5.2x. We expect leverage to 
decline below 5x within about two years and we expect funds from operations 
(FFO) to debt to be about 15% at the end of 2013, consistent with a "highly 
leveraged" financial risk profile. Premier and its affiliates operate 172 
dental offices in four Southwestern states.

We believe Premier will continue to open new dental care centers at a measured 
pace that can be financed internally. We expect new and maturing offices to 
result in low-single-digit annual revenue growth over the medium term, with 
generally flat same-store revenues. The addition of orthodontics to nearly all 
centers, which supported same-store growth in recent quarters, is 
substantially complete. Our base-case forecast for the 2012 EBITDA margin 
(excluding the effects of lease capitalization) is approximately 13.5% to 14%, 
compared with 13.2% in 2011. Over the medium term, we expect the EBITDA margin 
to fluctuate within a range of about 12.5% to 14.5%, similar to Premier's 
historical experience.

Premier has a "vulnerable" business risk profile, in our opinion, 
notwithstanding its sizable network of 172 centers that offer general and 
specialty dental services in California, Arizona, Texas, and Nevada. This is, 
in part, because the $110 billion U.S. dental practice industry is extremely 
fragmented and highly competitive with low barriers to entry. Treatment 
volume, especially for more discretionary services such as orthodontics, and 
patient financial capacity have exhibited some sensitivity to economic 
conditions. The availability of financing for patients also influences demand, 
especially from Premier's customer base. 

Premier offers affordable care, usually with in-house customer financing, to 
patients that tend to have below-average incomes and live in underserved 
communities. The company has pursued low-priced business, including patients 
covered by government programs and preferred provider commercial insurance. We 
view this strategy as risky because it is generally difficult for a dental 
service provider to earn an adequate profit in this market segment and Premier 
is vulnerable to government payment reductions. It is also exposed to credit 
risk from its patients.

Government payments accounted for 24% of Premier's revenue for the 12 months 
ended June 30, 2012, well above the 6% level for the total U.S. dental 
industry. We expect Premier's revenue from private-pay patients to continue 
growing as a percent of total revenue, but government payors will remain a 
significant source of revenue. Given its low prices, achieving satisfactory 
profitability requires a low cost structure. We believe Premier's operations 
are highly efficient, with centralized administrative functions and a high 
degree of automation, and contribute to its competitive advantages. Its dental 
offices are larger than the industry norm, and low capacity utilization could 
hurt Premier's profitability when demand is soft. However, a significant 
portion of the company's labor costs are variable and could be adjusted fairly 
quickly to meet changes in volume.

Denti-Cal, California's Medicaid program for dental care, accounted for 19% of 
Premier's total revenue for the 12 months ended June 30, 2012, down from over 
35% in 2002. The elimination of most adult Denti-Cal benefits in June 2009 
reduced Premier's revenue approximately 7% on an annualized basis. Premier 
remains vulnerable to rate cuts or other adverse government reimbursement 
changes, in light of continued pressure on state and federal budgets. We 
expect the transition of California's Healthy Families program to Denti-Cal to 
modestly reduce Premier's revenue and profit margins in 2013, offset by 
benefits from a strengthening economy, Premier's infrastructure improvements 
(e.g. full digitalization), and other initiatives.

Premier's business structure reflects differing state laws. In California, 
which still accounts for more than 90% of its total revenue, and Arizona, 
Premier owns its dental practices and employs the professional staff. In Texas 
and Nevada, it provides dental practice management (DPM) services to 
affiliated dental practices, which are not owned but consolidated in Premier's 
financial statements. We believe potential changes in state or federal laws, 
regulations, or accounting rules could hurt the DPM industry. Premier also 
offers dental benefit plans in California and Arizona. Group plans accounted 
for 11% of total revenue for the 12 months ended June 30, 2012. 

Premier leases space for its dental and other offices. We capitalize operating 
leases, which account for about 25% of pro forma adjusted debt. We expect a 
very gradual decline in debt leverage resulting from EBITDA growth. We assume 
term loan amortization of only 1% per year will be more than offset by growth 
in capitalized leases. Therefore, we expect lease-adjusted debt leverage to 
remain above 4.5x for the next five years.

Liquidity
Premier's liquidity is "adequate," in our view. As of June 30, 2012, Premier 
held $40 million of cash. When it is sold to New Mountain, we expect Premier 
to distribute nearly all cash on hand to its former owners. We expect about $6 
million of borrowing from the new $25 million revolving credit facility to 
finance some of the transaction costs. In 2013, we expect Premier to return to 
its historical pattern of generating very modest discretionary cash flow. 

Our analysis is based on the following assumptions and expectations:
     -- Sources of liquidity are expected to cover uses by more than 1.2x over 
the next 24 months. Even if EBITDA is 15% below our expectations, sources 
would still cover uses. 
     -- We expect Premier to generate about $35 million of FFO (after $15.5 
million of transaction costs) in 2012 and about $45 million in 2013.
     -- We expect capital spending of about $25 million to $30 million per 
year, mostly for new offices. If liquidity becomes strained, Premier could 
curtail the opening of new dental offices, as it did in 2009 and 2010. 
     -- Premier provides extensive customer financing, which we expect to grow 
as its business mix continues to shift toward private-pay patients. We 
estimate working capital growth will require an investment of about $5 million 
per year.
     -- Mandatory debt amortization is a modest $2.8 million per year. We 
expect Premier to maintain adequate headroom under its loan agreement covenant.
     -- We believe Premier has sound relationships with its banks, but lacks 
the ability to absorb a high-impact, low-probability event without refinancing.
 
Recovery analysis
For our complete recovery analysis, see our recovery report on Premier Dental 
Services, to be published after this report on RatingsDirect.

Outlook
Our rating outlook on Premier is stable, based on our expectation of 
low-single-digit annual EBITDA growth, continued generation of discretionary 
cash flow (excluding nonrecurring transaction costs in 2012), and a very 
gradual decline in debt leverage. We could lower our rating if we expected the 
covenant cushion to fall below 10% or if debt leverage approached 8x. We 
estimate this could occur if the EBITDA margin slid below 10% and revenue fell 
5%, or as a result of shareholder-friendly actions. Recognizing Premier's 
vulnerable business risk profile, we are unlikely to raise our rating in the 
foreseeable future. 

Related Criteria And Research
     -- Business Risk/Financial Risk Matrix Expanded, Sept. 18, 2012
     -- Methodology And Assumptions: Liquidity Descriptors For Global 
Corporate Issuers, Sept. 28, 2011
     -- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008
     -- 2008 Corporate Criteria: Rating Each Issue, April 15, 2008
 
Ratings List

New Rating

Premier Dental Services Inc.
Western Dental Services Inc.
 Corporate Credit Rating                B/Stable/--        

Premier Dental Services Inc.
 $275M secd term loan                   B
   Recovery Rating                      3
 $25M revolver                          B
   Recovery Rating                      3

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