New York, August 16, 2022 — Moody’s Investors Service (“Moody’s”) downgraded ADMI Corp.’s (dba TAG The Aspen Group, herein referenced as “TAG”) Corporate Family Rating to B3 from B2, the Probability of Default Rating to B3-PD from B2-PD, and the ratings on the first lien senior secured term loan, first lien senior secured revolving credit facility to B3 from B2. At the same time, Moody’s assigned a B3 rating to the new incremental $275 million term loan. The rating outlook is changed from negative to stable.
The actions follow TAG’s announced $275 million term loan that has been privately placed. Proceeds from the new term loan will be used to acquire the assets of AZ Pet Vet Holding, LLC, including the equity interests in each of its hospitals and associated contracts (“AZPetVet”). AZPetVet consists of 22 animal hospitals in the Phoenix, AZ metro area. The acquisition further adds to TAG’s capabilities in its retail health platform.
The downgrade of TAG’s CFR to B3 reflects TAG’s aggressive growth strategy and the use of debt to fund acquisitions and new clinic openings. TAG has recently acquired Physicians Immediate Care (PIC) and AZPetVet, which has caused leverage to rise roughly to 7.6x pro forma June 30, 2022. Given TAG’s persistently high financial leverage, and macroeconomic conditions including labor pressures and rising interest rates, there is a greater risk that debt/EBITDA will remain above 6.0x beyond the next 12-18 months. The downgrade also incorporates integration risk related to the AZPetVet deal, which is in a new sector for TAG, entering into the veterinary market. The recent acquisitions increase the potential for operations disruption and challenges in integration with limited synergies for the vet business. Entering the veterinary clinics space, Moody’s believes TAG will need to complete more acquisitions to scale quickly and achieve operating efficiencies. In addition, given the largely self-pay nature of the specialty dental and vet businesses, Moody’s believes that the company is more vulnerable to an economic downturn or reduced consumer spending.
The stable outlook reflects Moody’s expectation that the company’s leverage will moderate as earnings grow and cash flow metrics will continue to improve over the next 12-18 months following the recent acquisitions. Moody’s expects the company to maintain good liquidity and generate consistently positive free cash flow.
Governance risk consideration is a factor in this rating action as TAG has become more aggressive in use of debt to fund growth which resulted in maintaining high leverage.
Moody’s took the following rating actions:
Downgrades:
..Issuer: ADMI Corp.
….Corporate Family Rating, Downgraded to B3 from B2
….Probability of Default Rating, Downgraded to B3-PD from B2-PD
….Senior Secured 1st Lien Term Loan B2, Downgraded to B3 (LGD3) from B2 (LGD3)
….Senior Secured 1st Lien Term Loan, Downgraded to B3 (LGD3) from B2 (LGD3)
….Senior Secured 1st Lien Revolving Credit Facility, Downgraded to B3 (LGD3) from B2 (LGD3)
Assignments:
..Issuer: ADMI Corp.
….Gtd Senior Secured 1st Lien Term Loan B4, Assigned B3 (LGD3)
Outlook Actions:
..Issuer: ADMI Corp.
….Outlook, Changed To Stable From Negative
RATINGS RATIONALE
TAG’s B3 CFR reflects its elevated financial leverage of approximately 7.6x pro forma June 30, 2022, inclusive of both the PIC and AZPetVet transactions. TAG’s credit profile is constrained by integration risk from acquisitions, ambitious new office growth goals, high proportion of self-pay revenue, and aggressive financial policies. Moody’s expects that TAG will continue to outlay cash for new office openings, as well as acquisitions. Margins may contract as the company continues to experience cost pressures that have become salient in recent months. TAG may experience slower growth in 2022 as temporary demand surges normalize, labor pressures continue and financial conditions tighten. The rating encompasses Moody’s forecasted slowdown in volumes for the urgent care business following the very strong performance in 2021, and in the first quarter of 2022 from the higher COVID-19 testing volumes. The rating also reflects the execution risk entering the vet space, which Moody’s believes would require greater scale in order to achieve operational efficiencies in the space.
These risks are tempered by TAG’s strong market presence in the dental space, national footprint, geographic diversification, economies of scale relative to local competitors, and few national competitors of scale. TAG benefits from favorable demographics including an aging population with significant dental needs; and has demonstrated positive same store sales growth.
Moody’s anticipates TAG will maintain good liquidity as it had approximately $200 million of cash at June 30, 2022 and a $450 million revolving credit facility of which $220 million was drawn pro forma for the vet and PIC transactions. Moody’s still believes liquidity is good despite the revolver draws as Moody’s expects TAG to generate about $30 million of free cash flow in 2022, supported through the realization of remaining synergies, and other tuck in acquisitions. Borrowings are subject to a maximum first lien net leverage ratio of 8.75x, which is measured quarterly and triggered if the aggregate outstanding principal on the revolver exceeds 35% of revolving commitments. TAG is in compliance with such covenants. Alternate liquidity sources are limited as the company’s assets are encumbered by the senior secured credit facility. That being said, TAG could spin-off ClearChoice, its upscale denture business, if necessary to bolster liquidity.
ESG considerations are material to TAG’s ratings. TAG faces social risks such as the rising concerns around the access and affordability of healthcare services. However, Moody’s does not consider the DSOs to face the same level of social risk as many other healthcare providers because nearly 40% of revenue is derived from commercial insurance. TAG also faces other social risks such as reputational risks given the highly consumer driven model related to its ClearChoice products. Bad reviews online or bad publicity stemming from a small number of unhappy clients could result in material harm to the company’s revenue and cash flow.
From a governance perspective, Moody’s expects TAG’s financial policies to remain aggressive due to its private equity ownership. High gross financial leverage, and reduced cash balances, render TAG more vulnerable to unexpected operating setbacks, or incremental debt. Therefore, the company will need to execute at a high level to reduce leverage. TAG increased leverage meaningfully to fund a very large shareholder distribution in June of 2021, which came only 6 months after it increased leverage to fund the $1.135 billion acquisition of ClearChoice. Since the dividend, leverage has remained elevated as TAG has used its revolver and incremental term loans to fund growth.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
The ratings could be downgraded if the company’s liquidity weakens or earnings materially deteriorate. A substantial reduction in free cash flow or additional debt funded transactions could also result in a ratings downgrade. Additionally, the ratings could be downgraded if TAG experiences material integration related disruption.
An upgrade is possible if TAG adopts more conservative financial policies and maintains debt/EBITDA below 6.0 times. Additionally, effective management of growth that results in improved profitability and cash flow, and successful integration of recent transactions could support an upgrade.
TAG operations are comprised of over 1,250 offices in 45 states across four brands including Aspen Dental, ClearChoice, Wellnow, and Chapter (noting Chapter is not in the credit group). TAG, through the Aspen Dental brand, provides business support services to its 989 affiliated dental offices, while ClearChoice serves a network of 78 affiliated dental implant centers. ClearChoice practices are the leading national provider of fixed full-arch dental implants and related treatments. TAG also owns the WellNow Urgent Care business that has 189 locations. TAG is privately-held, and majority owned by Ares Management, LP and Leonard Green & Partners, L.P., with the remaining 35% owned by American Securities, management, and dentists. The company’s audited financials do not consolidate the practice ownership program (“POP”) practices. LTM revenue as of June 30, 2022, excluding POP offices, TAG generated consolidated net patient revenues of approximately $1.9 billion, while combined net patient revenues including POP offices was approximately $3.2 billion for the same period.
The principal methodology used in these ratings was Business and Consumer Services published in November 2021 and available at https://ratings.moodys.com/api/rmc-documents/356424. Alternatively, please see the Rating Methodologies page on https://ratings.moodys.com for a copy of this methodology.
REGULATORY DISCLOSURES
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Jaime Johnson
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