Research: Rating Action: Moody’s Affirms WellSky’s B3 CFR, Assigns B2 to $400M Term Loan Top-Up; stable outlook

New York, September 16, 2022 — Moody’s Investors Service (“Moody’s”) has confirmed the ratings of Project Ruby Ultimate Parent Corp. (“WellSky”), including B3 Corporate Family Rating (CFR), B3-PD Probability of Default Rating (PDR), and B2 senior senior secured instrument qualification. At the same time, Moody’s assigned a B2 rating to the additional $400 million non-fungible senior term loan. The outlook is stable.

The net proceeds from the additional term loan, along with $200 million in cash principal, will be used to fund the acquisition of a software provider for patient care transitions. Moody’s believes that this acquisition will moderately improve WellSky’s business profile by increasing its market share in the care coordination software market which WellSky entered in late 2020 by acquiring Careport. Overall, Moody’s expects the care coordination software market to continue to grow, driven by the need to reduce administrative costs and manage increasing regulatory emphasis on consistent treatment across settings. The ongoing consolidation of hospital systems will benefit scale providers and underscores the strategic merit of the acquisition.

Duties:

..Issuer: Project Ruby Ultimate Parent Corp.

….Senior Secured 1st Privilege Term Loan B1, Assigned B2 (LGD3)

Statement:

..Issuer: Project Ruby Ultimate Parent Corp.

…. Classification of the family of companies, Confirmed B3

…. Probability of default rating, confirmed B3-PD

….Secured senior bank credit facility, confirmed B2 (LGD3)

Outlook Actions:

..Issuer: Project Ruby Ultimate Parent Corp.

….Outlook remains stable

RATINGS RATIONALE

The B3 CFR is limited by WellSky’s high leverage, modest size and acquisition appetite. The company’s aggressive financial policies in private equity are a key ESG consideration that weighs on the credit profile. Pro forma for the acquisition, Moody’s adjusted leverage excluding certain one-time costs is approximately 8.7x as of June 30, 2022. Moody’s expects leverage to improve to less than 8x over the next 18 months based on projected mid-single-digit revenue and profit. growth as well as the realization of cost synergies arising from the acquisition. The extended period of deleveraging below 8x means there is minimal flexibility to engage in any other debt-financed activity (eg, mergers and acquisitions or dividend payments). Additionally, with higher leverage and weaker credit protection measures, the company will have very little wiggle room to deal with any operational mishaps or integration overruns.

The rating is supported by WellSky’s highly recurring revenue base and historically strong organic growth. The company’s products are “sticky” because the software is critical once fully integrated into a healthcare provider’s operations, resulting in software maintenance and subscription retention rates above 90%. Stable revenue visibility, strong EBITDA margins and low capital expenditure allow WellSky to generate stable free cash flow. In addition, the company has interest rate hedges which provide some protection against rising interest rates and support stronger free cash flow generation. Moody’s expects free cash flow to debt to be in the 1.5% to 2% range over the next 12 to 18 months.

Moody’s expects WellSky to maintain good liquidity over the next 12 months, supported by a pro forma cash balance of approximately $80 million and an undrawn revolver of $110 million maturing in 2026. over the next 12 months, Moody’s expects the company to generate between $30 million and $40 million. of free cash flow. WellSky’s Revolver has a first lien net leverage commitment of 7.5x (as defined by the credit agreement) which is triggered at 35% Revolver usage. Moody’s expects WellSky to maintain a good cushion under this covenant for at least next year.

The stable outlook reflects Moody’s expectation that WellSky will reduce its leverage to below 8 times debt/EBITDA within 18 months of closing the acquisition and suspend all new M&A activity until the deleveraging has been achieved, with free cash flow on debt below 10% and good liquidity.

WellSky’s corporate governance risk is highly negative. Moody’s expects WellSky’s financial policies to be aggressive with respect to private equity, as exemplified by additional debt for acquisition and a history of debt-financed acquisitions that has led to leverage. increased. Financial policies expose creditors to high event risk, reduce financial flexibility, and increase vulnerability to customer spending cuts. Moody’s does not expect the company’s short-term capital allocation strategy to prioritize debt repayment. Social risks are moderately negative and include exposure to a complex and changing regulatory environment, cybersecurity and human capital risks. Environmental risks are neutral to low, consistent with the overall software industry.

FACTORS THAT MAY LEAD TO IMPROVEMENT OR DEGRADATION OF RATINGS

Ratings could be upgraded if WellSky’s leverage is kept below 6.5 times debt/EBITDA and free cash flow to debt is kept above 6%. The ratings could be lowered if operating performance falls short of expectations, or if another debt-financed acquisition prevents WellSky from reducing its leverage below 8x within 18 months of the acquisition closing. Lower liquidity and/or negative free cash flow could also lead to a downgrade.

Based in Overland Park, Kansas, WellSky is a provider of enterprise healthcare software and related services, primarily for post-acute settings. The company generated pro forma revenue of approximately $610 million in fiscal 2022 (ending June 30). WellSky is controlled by private equity firms TPG Capital and Leonard Green & Partners.

The main methodology used in these ratings was Software published in June 2022 and available at https://ratings.moodys.com/api/rmc-documents/389867. Otherwise, please see the Scoring Methodologies page on https://ratings.moodys.com for a copy of this methodology.

REGULATORY INFORMATION

For details on key rating assumptions and Moody’s sensitivity analysis, see the Methodological Assumptions and Sensitivity to Assumptions sections in the Disclosure Form. Moody’s rating symbols and definitions can be found at https://ratings.moodys.com/rating-definitions.

For ratings issued on a program, series, category/class of debt or security, this announcement provides certain regulatory information regarding each rating of a subsequently issued bond or note of the same series, category/class of debt, security or under a program for which ratings are derived exclusively from existing ratings in accordance with Moody’s rating practices. For ratings issued on a media provider, this announcement provides certain regulatory information relating to the credit rating action on the media provider and each particular credit rating action for securities whose credit ratings are derived from the support provider’s credit rating. For the provisional ratings, this press release provides certain regulatory information relating to the provisional rating assigned, and to a final rating that may be assigned after the final issuance of the debt, in each case where the structure and conditions of the transaction n have not changed prior to the final rating being assigned in a way that would have affected the rating. For more information, please see the issuer/transaction page of the respective issuer at https://ratings.moodys.com.

For all relevant securities or rated entities receiving direct credit support from the lead entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action , the associated regulatory information will be that of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to the jurisdiction: Ancillary services, Disclosures to the rated entity, Disclosures to be provided by the rated entity.

The ratings have been communicated to the rated entity or its designated agent(s) and issued without modification resulting from such communication.

These notes are solicited. Please refer to Moody’s Policy for the Designation and Assignment of Unsolicited Credit Ratings available on its website. https://ratings.moodys.com.

The regulatory information contained in this press release applies to the credit rating and, if applicable, the outlook or rating revision relating thereto.

Moody’s general principles for assessing environmental, social and governance (ESG) risks in our credit analysis are available at https://ratings.moodys.com/documents/PBC_1288235.

At least one ESG consideration was material to the announced credit rating metric(s) described above.

The worldwide credit rating on this credit rating announcement has been issued by one of Moody’s affiliates outside the EU and is approved by Moody’s Deutschland GmbH, An der Welle 5, Frankfurt am Main. -le-Main 60322, Germany, in accordance with Article 4(3) of Regulation (EC) No 1060/2009 on credit rating agencies. Further information on the EU approval status and the Moody’s office that issued the credit rating can be found at https://ratings.moodys.com.

The worldwide credit rating on this credit rating announcement has been issued by one of Moody’s affiliates outside the UK and is approved by Moody’s Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the United Kingdom. . Further information on the UK endorsement status and the Moody’s office that issued the credit rating can be found at https://ratings.moodys.com.

Please see https://ratings.moodys.com for any updates on changes to the lead rating analyst and Moody’s legal entity that issued the rating.

Please see the issuer/transaction page at https://ratings.moodys.com for additional regulatory information for each credit rating.

Mariya Moore
Vice President – Senior Analyst
Corporate Finance Group
Moody’s Investors Service, Inc.
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New York, NY 10007
UNITED STATES
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Stephen Sohn
Associate General Manager
Corporate Finance Group
JOURNALISTS: 1 212 553 0376
Customer service: 1 212 553 1653

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