S&P Downgrades ExamWorks (EXAM) to 'B'; Outlook is Stable

S&P Global Ratings lowered its corporate credit rating on ExamWorks Group Inc. (NYSE: EXAM) to 'B' from 'B+' and removed it from CreditWatch, where it was placed with negative implications on April 28, 2016. The rating outlook is stable.

At the same time, we assigned our 'B' issue-level rating and '3' recovery rating to ExamWorks' proposed $150 million revolving credit facility and $770 million first-lien term loan. The '3' recovery rating indicates our expectation for meaningful (50%-70%, at the lower end of the range) recovery in the event of payment default. We also assigned our 'CCC+' issue-level rating and '6' recovery rating to ExamWorks' proposed $340 million second-lien notes. The '6' recovery rating indicates our expectation for negligible (0%-10%) recovery in the event of default.

"The downgrade reflects the increase in leverage to 7.5x from 3.9x because of the leveraged buyout," said S&P Global Ratings credit analyst James Uko. We also expect FFO to debt will decrease to approximately 7.0% from 18%. We project ExamWorks to generate $40 million to $50 million in free cash flow through 2017. Despite positive cash generation, we expect financial policy will be aggressive and that the company will now use its cash flows in favor of shareholder returns rather than permanent debt reduction.

The transaction does not change our view of ExamWorks' business risk profile. ExamWorks remains narrowly focused on the niche business of arranging independent medical examination (IME) services for insurers and other parties to confirm the veracity of sick or injured individuals. The company is also exposed to regulatory changes in some jurisdictions and low barriers to entry, including the ability for customers to arrange these services in-house. These factors are only partially offset by the company's leading market share in each of its markets, its broad network of doctors, and its software and data-security infrastructure, which we view as competitive advantages that continue to help the company gain market share in a relatively mature market.

The stable outlook on ExamWorks reflects our expectation that, despite high-single-digit to low-double-digit revenue growth and positive cash flow generation, debt to EBITDA will remain above 7x and FFO to debt will be below 12% through 2017.

We could lower the rating if the company's liquidity severely weakens as ExamWorks generates negligible or negative cash flow. This could be the result of increased competition, and subsequent adverse pricing headwinds, leading to mid-single-digit revenue declines and a margin contraction of more than 400 basis points.

Although unlikely given currently high leverage, we could raise the rating if we became convinced that adjusted debt to EBITDA would decline and remain below 5x and FFO to debt would increase and remain above 12%. However, even if the company outperformed our base-case projections and credit measures approached these levels, we would be highly skeptical that the company would maintain these results, given financial sponsor ownership and our expectation that its owners would prioritize shareholder returns over permanent debt reduction.

You May Also Be Interested In

• Lowe's (LOW) PT Lowered to $275 at Guggenheim
• UBS Downgrades Converge ICT Solutions Inc (CNVRG:PM) to Neutral
• Walmart (WMT) PT Lowered to $130 at Guggenheim