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S&P revises Rural/Metro outlook to negative
2012年10月4日 / 下午4点27分 / 5 年前

S&P revises Rural/Metro outlook to negative

Overview
     -- U.S. emergency transport services provider Rural/Metro announced very 
weak EBITDA for the June 2012 quarter, well below our expectations, driven by 
a significant charge for uncollectible receivables.
     -- Cash flow is also negative for fiscal-year 2012, whereas we had been 
expecting modest positive cash flow.
     -- We are revising our outlook to negative, reflecting delays in 
achieving the run-rate EBITDA that we had expected and persistently high 
leverage. We are affirming our 'B' corporate credit rating.
     -- The negative outlook reflects increased potential that cash flows will 
not improve at a pace that will allow the company to reduce borrowings under 
its revolving credit facility in fiscal-year 2013.
 
Rating Action
On Oct. 4, 2012, Standard & Poor's Ratings Services revised its outlook on 
Scottsdale, Ariz.-based Rural/Metro Corp. to negative. The revision reflects 
weaker earnings and cash flow, prompting higher borrowings on its revolving 
credit and leading to very weak debt protection measures. We had expected 
these measures to improve. The revision is also based on ongoing cash outflows 
resulting from weaker earnings, prolonged AR collection, and higher capital 
spending than anticipated. We also revised our liquidity assessment to "less 
than adequate," reflecting cash outflows and prospects for diminished covenant 
headroom.

Rationale
The rating reflects a "highly leveraged" financial risk profile (according to 
our criteria). This is attributable to thin cash flows and very high debt to 
EBITDA in excess of 7x. Additionally, bank-defined EBITDA will not add back 
the addition of reserves to cover uncollectible receivables, adversely 
affecting cushions against covenants. The rating also reflects a "weak" 
business risk profile, given its narrow market focus providing emergency 
transport and limited geographic operation. Rural/Metro is a national 
emergency transport provider, with some concentration in California and the 
Southwest.

We expect that discretionary cash flow will be very modestly positive for the 
2013 fiscal year and that leverage will only decline slightly, likely ending 
the year still over 7x. Rural/Metro's EBITDA generation since its leveraged 
buyout transaction in June 2011 only reached the level we expected in the 
March 2012 quarter. Our earnings expectations were further hampered by the 
June 2012 announcement that a sizable adjustment was made to the calculation 
of uncollectible receivables. We now expect the company to generate about the 
same level of EBITDA in fiscal-year 2013 (ending June) that we originally 
expected for fiscal-year 2012, despite acquisitions and new contracts. (We 
calculate EBITDA largely as reported.) We are not expecting much improvement 
because weaker receivable collectability has eroded ongoing levels of 
profitability. Cash flows also continue to lag as a result of ongoing slow 
receivable collection, higher capital spending, and weaker earnings. 
Rural/Metro had $30 million in borrowings outstanding under its $110 million 
revolving credit facility as of June, boosting leverage to over 7x.

We view Rural/Metro's business risk as weak. Despite its position as one of 
the largest commercial providers of medical transport services, with good 
growth in emergency transports, the company operates in a highly fragmented 
industry with less than 10% market share, has higher uncompensated care than 
many health care providers, and faces third-party reimbursement risk. 
Rural/Metro receives about 60% of its revenues from Medicare and Medicaid and 
34% from commercial insurance. Rural/Metro has some geographic concentration, 
with the majority of its EBITDA generated in four states. The company 
generally contracts with government entities, hospitals, nursing homes, and 
other health care facilities to provide emergency and nonemergency medically 
necessary ambulance transportation. Rural/Metro also provides fire protection 
services to residential and commercial property owners (less than 13% of 
revenues).

We expect uncompensated care to remain a credit factor in fiscal-year 2013 and 
beyond. Despite steps to reduce uncompensated care and improve cash 
collections, such as access to electronic medical records in ambulances, 
levels of uncompensated care have increased modestly. Higher levels of 
uncompensated care are also contributing to shortfalls in earnings and cash 
flow.

Once recent acquisitions are fully annualized, we expect debt to EBITDA will 
remain over 7x through fiscal-year 2013. Given cash flow generation that is 
below expectations, we do not envision significant debt reduction in the near 
term. Over time, gradually expanding EBITDA levels could modestly strengthen 
leverage. These factors underpin our highly leveraged financial risk profile.

Liquidity
Rural/Metro's liquidity is less than adequate, with sources of cash likely to 
very modestly exceed uses for the next 12 to 24 months. Cash sources include 
$40 million available under the $110 million revolving credit facility 
(accounting for about $45 million of letters of credit and $30 million 
outstanding as of June 30, 2012), and about $30 million of expected annual 
funds from operations for fiscal-year 2013. We expect cash uses to include 
capital expenditures of about $20 million in fiscal-year 2013. While working 
capital has been a use of funds through June 2012, we expect a reversal by the 
first half of fiscal-year 2013 and minimal working capital investment 
thereafter. Our assessment of Rural/Metro's liquidity profile incorporates the 
following expectations and assumptions: 
     -- We expect coverage of uses of about 1.25x for the next year.
     -- We do not expect net sources to be positive in the event that EBITDA 
drops 15%. In that scenario, which is not in our base-case expectation, the 
covenant cushion would likely have been fully eroded, limiting availability 
under the revolving credit.
     -- The covenant cushion on the term loan and revolving credit facility 
has diminished to the mid-teen area. While covenant cushion is likely adequate 
given our 2013 operating expectations, availability could become constrained 
should earnings fall short of our estimates following the September 2012 step 
down.
     -- We believe Rural/Metro is unlikely to absorb low-probability shocks 
with limited need for refinancing, given its substantial debt obligations.
     -- The company benefits from nominal amortization payments under its term 
loan.
 
Recovery analysis
For the complete recovery analysis, see Standard & Poor's recovery report on 
Rural/Metro, published Jan. 31, 2012, on RatingsDirect.

Outlook
The outlook is negative, based on the increased potential that cash flows will 
not recover at a pace sufficient to allow the company to reduce debt. If 
negative cash flows are not reversed by the December 2012 quarter, we could 
lower the rating. Over the balance of fiscal-year 2013, a lower rating could 
be prompted if uncompensated care estimates are still insufficient or if new 
contracts are not as profitable as expected, which results in negative cash 
flows and escalated covenant pressure. A 5% contraction in EBITDA would 
trigger such a rating action.

We would consider revising the outlook to stable once Rural/Metro is on a 
clear trajectory to achieve our fiscal-year 2013 expectation EBITDA and at 
least $10 million of free operating cash flow, and is able to reduce debt.

Related Criteria And Research
     -- Methodology: Business Risk/Financial Risk Matrix Expanded, Sept. 18, 
2012
     -- Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011
     -- Use Of CreditWatch And Outlooks, Sept. 14, 2009
     -- Criteria Guidelines For Recovery Ratings, Aug. 10, 2009
     -- Standard & Poor's Revises Its Approach To Rating Speculative-Grade 
Credits, May 13, 2008
     -- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008
     -- 2008 Corporate Criteria: Rating Each Issue, April 15, 2008
     -- 2008 Corporate Criteria: Ratios And Adjustments, April 15, 2008

Ratings List

Ratings Affirmed/Outlook Action
                                        To                 From
Rural/Metro Corp.
 Corporate Credit Rating                B/Negative/--      B/Stable/--

Ratings Affirmed

Rural/Metro Corp.
 Senior Secured                         B+                 
   Recovery Rating                      2
 Senior Unsecured                       CCC+               
   Recovery Rating                      6


Complete ratings information is available to subscribers of RatingsDirect on 
the Global Credit Portal at www.globalcreditportal.com. All ratings affected 
by this rating action can be found on Standard & Poor's public Web site at 
www.standardandpoors.com. Use the Ratings search box located in the left 
column.

我们的标准:汤森路透“信任原则”
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