Netsmart LLC Ratings Affirmed On Acquisition Plan, First-Lien Term Loan Add-On; Outlook Revised To Stable From Positive

  • Netsmart LLC underperformed our fiscal 2018 base-case expectations resulting in lower-than-expected margins and higher leverage. In addition, we expect the company to complete a debt-financed acquisition in the lower-margin services business.
  • Based on weaker margin and higher leverage expectations, and the potential impact of an acquisition, we now expect leverage of about 8.5x in 2019 and 7.5x in 2020, compared with our prior expectation for leverage to fall below 7.5x in 2019.
  • We revised our outlook on Netsmart to stable from positive and affirmed our 'B-' issuer credit rating.
  • Our 'B-' first lien senior secured issue-level rating, with a recovery rating of '3', and our 'CCC' second lien issue-level rating, with a recovery rating of '6' are unchanged.
  • The stable outlook reflects our expectation for continued organic growth combined with continued growth from acquisitions. We also expect adjusted leverage to be in the 7.5x–8.5x range, with a moderate level of acquisitions, over the next two years with EBITDA margins of about 25%.
NEW YORK (S&P Global Ratings) April 23, 2019--S&P Global Ratings today took the rating actions listed above. The outlook revision to stable reflects the company's recent underperformance, which was below our prior expectations largely due to weaker operating performance stemming from fewer than expected large deals signed in the first three quarters of 2018, combined with a potential debt-financed acquisition, resulting in higher leverage than we expected. Based on these results, and our updated expectations, we have lowered our forecast to reflect the company's lower margins, which are in large part due to the shortfall of larger deals signed, which created less one-time high-margin license revenue. Our revised forecast results in projected leverage of about 8.5x in 2019 and 7.6x in 2020, prior to any acquisitions beyond 2019. We expect the business to produce $20 million-$25 million in discretionary cash flow in 2019 and 2020, and free operating cash flow (FOCF) to debt to be about 2.5% in 2019 and 3.5% in 2020. We previously expected FOCF to debt to be above 5.0% in 2019.
The stable outlook reflects our belief that the company will continue to grow modestly through organic growth complemented with debt-financed tuck-in acquisitions.
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