ERC Topco Holdings LLC (ERC), operating as Eating Recovery Center, is recapitalizing as part of a leveraged buyout by private equity company CCMP Capital Advisors L.P.


  • ERC Topco Holdings LLC (ERC), operating as Eating Recovery Center, is recapitalizing as part of a leveraged buyout by private equity company CCMP Capital Advisors L.P.
  • With the new debt financing, we expect pro forma adjusted leverage to be about 8.0x for 2017.
  • We are assigning a 'B-' corporate credit rating to the company. The outlook is stable.
  • At the same time, we are assigning a 'B-' issue-level rating and '3' recovery rating to the first-lien credit facility.
  • Our stable rating outlook reflects our expectation that ERC will deliver strong revenue growth and margin improvement in the next few years supported by stable reimbursement from commercial payors and consistent capacity increases. That said, rapid expansion will suppress free cash flow generation in the coming years.


We could lower the rating if the ERC's EBITDA level declined by approximately 
25% or more from our expectation, such that it is unable to cover its fixed 
charges with no clear prospects of recovery, which would likely lead us to 
view the capital structure as unsustainable. Given ERC's growth strategy, we 
could lower the rating if the company experiences slower-than-expected growth 
in patient volume, leading to softer margins and even less free cash flow than 
our forecast of little free cash flow. This will likely be a result of 
heightened competition or less-than-expected integration benefits as the 
company builds scale. Another key risk is reimbursement risk and we believe 
that ERC's small scale and sole focus in one niche segment will make it 
difficult to absorb weaker reimbursement, which may include a future rate cut.


We could consider raising the rating if the company could grow and sustainably 
produce positive free cash flow of around $20 million per year. We believe to 
achieve this, the company will need to improve its business risk by increasing 
its scale while also achieving and maintaining our base-case EBITDA margin 
estimate, resulting in consistent free cash flow level of approximately $20 
million per year. However, we believe an upgrade is unlikely over the next 12 
months.