S&P Downgrades MedAssets (MDAS) to 'B'; Removes from CreditWatch Negative

Standard & Poor's Ratings Services lowered all its ratings on MedAssets Inc. (Nasdaq: MDAS), including the corporate credit rating to 'B' from 'BB-', and removed the ratings from CreditWatch, where they were placed with negative implications on Nov. 5, 2015. The rating outlook is stable.

At the same time, we assigned a 'B' issue-level rating to the proposed $1,230 million first-lien credit facility, which consists of a $100 million revolving credit facility due 2021 and an $1,130 million term loan due 2022. The recovery rating is '3', indicating our expectation for meaningful (50% to 70%; at the low end of the range) recovery for lenders in the event of a payment default.

Also, we assigned a 'CCC+' issue-level rating to the proposed $500 million second-lien term loan due 2023. The recovery rating is '6', indicating our expectation for negligible (0% to 10%) recovery for lenders in the event of a payment default. Pamploma Capital will use proceeds of the new debt to fund the acquisition of MedAssets.

The borrowers of the facilities will initially be Magnitude Acquisition Corp., but the surviving entity following the acquisition will be MedAssets Inc.

We will withdraw the rating on the existing issue-level ratings once these issues are repaid.

"Our downgrade on MedAssets is based on the acquisition of the company by Pamplona Capital in an LBO, which will cause leverage to rise materially," said Standard & Poor's credit analyst Tulip Lim. We expect leverage will now remain around 7x over the next couple of years, in contrast to our previous expectation that leverage would remain between 3.5x to 4x. Despite high leverage, we expect the company will generate moderate discretionary cash flow.

MedAssets provides cost, revenue, and process management solutions to the health care industry, providing services through its Spend and Clinical Resource Management (SCM) segment, which includes a group purchasing organization (GPO), and through its revenue cycle management (RCM) segment. The GPO market is consolidated, and MedAssets along with the other top four competitors together control about 85% of the market. We view the industry as relatively stable because the GPO industry is characterized by relatively long (three to five year) contract terms and about 80% of revenues are recurring. In contrast, MedAssets has only a 5% market share in the highly fragmented RCM business. Overall, the company's EBITDA margins are strong compared with other health care service companies, supporting our assessment of a "fair" business risk profile.

The stable rating outlook reflects our expectation that despite the projected modest revenue growth starting in 2017, stable margins, and our expectation that MedAssets will generate moderate discretionary cash flow, we expect that the company will sustain leverage well above the mid-5x area over the next few years.

If the company's interest coverage drops below 1.7x with limited prospects for improvement, we could lower the rating. We estimate this could result from a mid-single-digit decline in revenue and about 250 basis points in EBITDA margin contraction. Such a scenario could materialize if intensifying competitive pressure lead to contract losses. Alternatively, if LIBOR rises to 300 basis points, interest coverage could drop to this level. Lastly, if the SCM business is sold, but cash flow generation or interest coverage is low, we could also lower the rating.

We could raise our corporate credit rating if the company's long-term business strategy became clearer and the risk of a material spin-off were reduced. In addition, we would also have to be convinced that the company would sustain leverage around the mid-5x area. We view this scenario as unlikely over the near term given high leverage and sponsor ownership. It would likely require debt reduction of $350 million or more.

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