Correctional health care provider Valitas could be at risk of breaching its financial covenant step-downs for the September testing period, according to Standard & Poor’s.
The rating agency on Thursday lowered its corporate credit rating on Valitas, and the company’s senior secured debt, to CCC from B-.
The ratings remain on CreditWatch with negative implications, reflecting S&P’s expectation that the company could be in covenant default in November, and could experience a liquidity event within the next year if it is unable to maintain revolver access.
In the secondary market, the term loan did not appear active following the downgrade, but note the off-the-run credit had recently been quoted in wide markets wrapped around 80, according to sources.
The loans were syndicated in May 2011 via Barclays Capital and Bank of America Merrill Lynch to back Valitas’ merger with America Service Group.
Lead credit analyst Shannan Murphy warns that the company’s ability to negotiate an amendment to these financial covenants is highly uncertain given the short time frame until its financial statements are filed, as well as some recent negative operating trends affecting the business, including the recent loss of a contract in New York and underperformance under the company’s Florida prison contract (its largest).
“Moreover, our rating action also reflects our expectation that the company will continue to require access to a revolving credit facility or other source of backup liquidity, especially in the first half of each fiscal year where cash flow is traditionally negative; without this access, we believe that the company could encounter a liquidity event due to normal month-to-month working capital swings,” Murphy said.
S&P expects low-double-digit EBITDA growth in 2015 and very modest EBITDA growth in 2016.
Valitas Health Services, Inc., through its operating subsidiaries, Corizon, Inc. and Corizon Health, Inc., is a provider of contract healthcare services to correctional facilities. Based in Brentwood, Tenn., Valitas is controlled by Beecken Petty O’Keefe & Company. — Rachelle Kakouris