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Gordian Medical, Inc. — Moody’s assigns B2 CFR to Gordian Medical; outlook stable

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Rating Action: Moody’s assigns B2 CFR to Gordian Medical; outlook stableGlobal Credit Research – 08 Mar 2021New York, March 08, 2021 — Moody’s Investors Service, (“Moody’s”) assigned a B2 Corporate Family Rating (CFR) and a B2-PD Probability of Default (PDR) Rating to Gordian Medical, Inc. (“Gordian” dba AMT). At the same time, Moody’s assigned B1 ratings to the proposed senior secured credit facilities, including $280 million 6-year Term Loan B and $40 revolving 5-year credit facility. The outlook is stable.Proceeds from the new credit facilities, together with new sponsor equity from One Equity Partners and Restorix seller rollover equity, will be used to fund the acquisition of RestorixHealth and pay related fees and expenses.The B1 rating assigned to the proposed credit facilities reflects their first lien position on substantially all assets of the borrowers and the level of junior capital in the company’s capital structure comprised of an $35 million Unsecured Seller Note and a $73 million Subordinated Seller Note.Ratings assigned:Issuer: Gordian Medical, Inc.Corporate Family Rating, at B2Probability of Default Rating, at B2-PD$40 million senior secured 1st lien revolver expiring 2026, at B1 (LGD3)$280 million senior secured 1st lien term loan B due 2027, at B1 (LGD3)The rating outlook is stableRATINGS RATIONALEGordian’s B2 CFR reflects the combined company’s high initial leverage, at roughly 5 times on a pro forma basis. The rating is also constrained by the combined company’s modest (but improving) scale with combined revenue of approximately $270 million, and narrow business focus on wound care treatment in two primary settings, Skilled Nursing Facilities (“SNFs”) and wound clinics. Gordian has some payor concentration with Medicare accounting for 36% of pro forma revenue.The B2 rating is supported by both companies’ track records of solid revenue and earnings growth and Moody’s expectation that this growth will continue. This reflects favorable fundamentals for wound care industry including ageing population, growing incidence of chronic illnesses, and a stable reimbursement environment. Moody’s views integration risk as modest as there is limited operating overlap between the two companies, with only modest back-office integration required. Moody’s forecasts that adjusted debt/EBITDA will decline towards mid-4 times by the end of 2022 primarily due to earnings growth due in part to patient volumes recovering from the negative impact of the coronavirus pandemic during 2020. Given the company’s profit margins and modest capital requirements (mostly IT and systems investments), Moody’s expects the company to generate solid free cash flow in excess of $25 million per year.Social and governance considerations are material to Gordian’s credit profile. Moody’s regards the coronavirus pandemic as a social risk under Moody’s ESG framework, given the substantial implications for public health and safety. RestorixHealth’s performance will be negatively affected by reduced volume of procedures since RestorixHealth’s wound care centers are affiliated with hospitals. Gordian also faces higher social risks reflecting the high reliance on Medicare and the need to maintain proper controls and compliance procedures which was evidenced when under previous management and owner Gordian filed for bankruptcy in February 2012 due to a reimbursement dispute with Medicare over billing separately for dressings related to gastronomy tubes. Among governance considerations, Gordian’s financial policies under private equity ownership are aggressive, reflected in high debt levels following the acquisition of RestorixHealth.The stable outlook reflects Moody’s expectation that Gordian’s leverage will approach 4.5 times over the next 12-18 months.FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGSRatings could be downgraded if the company’s operating performance suffers due to failure to effectively manage its growth, if integration issues arise, or if pricing pressure develop. The rating could also be downgraded if the company’s financial policies become more aggressive. Specifically, the ratings could be downgraded if adjusted debt to EBITDA is sustained over 5 times.Ratings could be upgraded if Gordian successfully executes the combination and benefits competitively from the larger scale and service offerings. An upgrade would also be supported by demonstration of conservative financial policies including debt reduction. Specifically, the ratings could be upgraded if adjusted debt to EBITDA was sustained below 4 times.Following are some of the preliminary credit agreement terms, which remain subject to market acceptance.The proposed first lien term loan is expected to have no financial maintenance covenants while the proposed revolving credit facility will contain a springing maximum first lien leverage ratio of 4.75:1.00 that will be tested when the revolver is more than 35% drawn. In addition, the first lien credit facility contains incremental facility capacity up to the greater of $85.0 million and 100.0% of Consolidated EBITDA plus unlimited amounts up to: First Lien Net Leverage of 3.25x if secured on a pari passu basis. Alternatively, the ratio test may be satisfied on a leverage neutral basis if incurred in connection with a permitted acquisition or investment. A portion of the incremental (amount to be determined) may be incurred with an earlier maturity date than the initial term loans. The 100% asset-sale proceeds prepayment requirement has a leverage-based step-down to 50%, subject to First Lien Net Leverage reaching 2.75x. Collateral leakage is permitted through transfers of assets to unrestricted subsidiaries; material intellectual property may not be transferred to an unrestricted subsidiary. Only subsidiaries that are wholly-owned must act as subsidiary guarantors; dividends or transfers of partial ownership interests could jeopardize guarantees, with no explicit protective provisions limiting such releases.Gordian will maintain very good liquidity over the next 12-18 months, with no near-term debt maturities. Liquidity is supported by $5 million of cash at close of the refinancing transaction. Moody’s estimates that Gordian free cash flow be at least $25 million annually. Liquidity is supported by a new 5-year revolving credit facility that provides for borrowings of $40 million. This facility has springing First Lien Net Leverage Covenant of 4.75x when 35% drawn. Moody’s expects the company to make minimal draws on this facility over the next 12 months. Alternative sources of liquidity are limited as substantially all assets are pledged. There is no financial covenant on the term loan.Gordian Medical is a leading provider of specialized wound care supplies and related clinical education services in the United States. The Company operates in the post-acute care space as a clinically oriented provider of wound care management and ostomy, urology and tracheostomy supplies and services. Pro forma revenue was approximately $270 million in 2020.The principal methodology used in these ratings was Business and Consumer Service Industry published in October 2016 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1037985. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.REGULATORY DISCLOSURESFor further specification of Moody’s key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody’s Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody’s rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider’s credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.These ratings are solicited. Please refer to Moody’s Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.Moody’s general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1243406.At least one ESG consideration was material to the credit rating action(s) announced and described above.The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody’s affiliates outside the EU and is endorsed by Moody’s Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody’s office that issued the credit rating is available on www.moodys.com.The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody’s affiliates outside the UK and is endorsed by Moody’s Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody’s office that issued the credit rating is available on www.moodys.com.Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody’s legal entity that has issued the rating.Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating. Jean-Yves Coupin Vice President – Senior Analyst Corporate Finance Group Moody’s Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. 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