August 25, 2017 / 2:16 PM / a year ago

Fitch Downgrades Mydentist to 'B-'; Withdraws Ratings

(The following statement was released by the rating agency) LONDON, August 25 (Fitch) Fitch Ratings has downgraded Turnstone MidCo 2's (Mydentist) Long-Term Issuer Default Rating (IDR) to 'B-' from 'B'. The Outlook is Stable. We have also downgraded the senior notes issued by IDH Finance PLC to 'B' from 'B+' and Mydentist's super senior revolving credit facility (RCF) to 'BB-' from 'BB'. The Recovery Ratings for the senior notes and the RCF remain at 'RR3' and 'RR1', respectively. Concurrently, we have also withdrawn Mydentist's IDR and instrument ratings for commercial reasons. Today's downgrade reflects Mydentist's higher leverage and weaker coverage ratios post refinancing to levels more commensurate with a 'B-' rating, following profit margin deterioration and continued units of dental activity (UDA) underperformance. As a result Fitch projects funds from operations (FFO) adjusted net leverage to peak around 8.6x and FFO fixed-charge cover to weaken to 1.4x. The rating, however, remains underpinned by the strengths of the rebranded Mydentist (previously IDH), and its leading market position in the UK's National Health Service (NHS) dental sector, characterised by long-term contracts supporting stable cash generation. KEY RATING DRIVERS Continued UDA Under-Delivery: The ratings reflect decreased (UDA) delivery at 90.4% in FY17 (financial year ended March 2017) compared with 92.4% in FY16 and management's guidance of flat near-term delivery. This was the result of a change in the underlying patient mix and increased NHS scrutiny over delivery, claims and performance benchmarks, which we view as an industry-wide trend to improve the system's value and service. As a result Mydentist's productivity suffered with new management taking active measures to recover UDA performance. This includes increasing the number of dentists, actively managing dentist productivity, and streamlining administration, in addition to increasing the share of private treatments. Margin Deterioration: We expect EBITDA margin to stabilise at 10.5% in FY18 before gradually increasing under assumed low single-digit sales growth and slow recovery in UDA delivery. This follows a decline in EBITDA margins to 10.9% in LTM 1Q FY18, from 11.7% in FY17 and 14.2% in FY16, primarily driven by reduced gross margin as a result of increased usage of locums in dental practices and adverse FX impact on the Dental Directory division, increases in both headcount and living wage, as well as an increasing share of the lower-margin private and Dental Directory businesses in total revenue. Weak Leverage & Financial Flexibility: As a result of a larger amount and the high cost of debt following the recent refinancing and profit deterioration due to UDA underperformance and FX impact, FFO adjusted net leverage increased to 7.9x in FY17 (vs. 6.7x in our prior rating case projections) and is expected to increase further to 8.6x in FY18 in light of the even weaker operating results in 1Q FY18. FFO fixed charge cover weakened to 1.6x (vs. 2.0x as per prior expectation) and is expected to decrease further to 1.4x in FY18. We view these metrics as commensurate with a 'B-' rating. Elevated Execution Risk: New management has been put in place to tackle the challenges the company is facing. Strategy has been changed to limit acquisitions and focus on productivity of existing practices. There are plans to improve business performance. However, actions will take time to feed into performance. In order to drive growth, capex is still needed to improve facilities to attract privately funded patients. Failure to turn around could compromise the deleveraging profile. UK's Largest Dental Practice: Mydentist is the largest dental corporation in the UK and is almost twice the size of its closest competitor Oasis, now owned by Bupa. The company's dominant market positioning and size make Mydentist an important market participant and provides it with benefits of scale in terms of sourcing, administration, and marketing. DERIVATION SUMMARY Fitch places Mydentist in the hospital & care home subsector of the healthcare sector. It is characterised by limited geographic diversification; however, it has a leading position in the UK dentistry market. It is the largest dental corporation in the UK and is almost twice the size of its closest competitor Bupa. The ratings are also underpinned by NHS contracts, which support Mydentist's defensive business model and stable cash generation. KEY ASSUMPTIONS Fitch's expectations are based on the agency's internally produced, conservative rating-case forecasts. They do not represent the forecasts of rated issuers individually or in aggregate. Key Fitch forecast assumptions are listed below. - Slow recovery in UDA delivery and NHS contract handbacks leading to a decline in NHS revenue for the next two years. - 10% annual growth in the private segment. - Moderate growth in Dental Directory (10% in FY18 and 5% p.a. thereafter). - Growth in group revenue of 1.1% in FY18 and 1.8% in FY19. - EBITDA margin declining to 10.5% in FY18 before slowly recovering towards 11.5% in FY21. - No acquisition of dental practices in FY18 and FY19 as management shifts focus to performance improvement over external growth. RATING SENSITIVITIES Not applicable. LIQUIDITY Satisfactory Liquidity Profile: With no material debt maturity over the next five years post refinancing, Mydentist's liquidity is satisfactory, with GBP12.8 million of readily available cash available at end-June 2017 and GBP100 million of an undrawn committed RCF. Contact: Principal Analyst Louise Liu Analyst +44 20 3530 1660 Supervisory Analyst Frank Orthbandt Director +44 20 3530 1037 Fitch Ratings Limited 30 North Colonnade London E14 5GN Committee Chairperson Pablo Mazzini Senior Director +44 20 3530 1021 Media Relations: Adrian Simpson, London, Tel: +44 203 530 1010, Email: Summary of Financial Statement Adjustments - Lease obligations have been capitalised using the multiple of 8x. Additional information is available on For regulatory purposes in various jurisdictions, the supervisory analyst named above is deemed to be the primary analyst for this issuer; the principal analyst is deemed to be the secondary. 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