Best’s News & Research Service - June 12, 2015 03:17 PM (EDT)
A.M. Best Downgrades Issuer Credit Rating of Western Dental Services, Inc.
Oldwick //BestWire// - A.M. Best has downgraded the issuer credit rating (ICR) to "bbb" from "bbb+" and affirmed the financial strength rating of B++ (Good) of Western Dental Services, Inc. (WDS) (Orange, CA). The outlook for both ratings is stable.
New Mountain Partners III, L.P., a private equity firm, is the ultimate parent organization of PDS HoldCo Inc. (PDSH). WDS is a wholly owned subsidiary of the holding company, Premier Dental Holdings, Inc. (PDH), which is owned by PDSH.
The rating downgrade is partially due to WDS being the primary source of dividend for its intermediate holding parent. Additionally, A.M. Best remains concerned about the level of PDSH's financial leverage, recent goodwill impairment and earnings levels, as well as elevated cost of capital as its debt is being serviced primarily by WDS. The organization receives additional capital protection due to restrictions from the California Department of Managed Care; however, PDSH's highly leverage capital structure continues to place pressure on WDS. Moreover, the organization that holds the debt was recently downgraded based on an anticipated non-compliance with its financial covenant to the debt term as of March 2015 requiring an equity cure from its sponsor in support of its operations.
The rating downgrade was also due to the company's decrease in earnings and an increase in its leverage ratio. The rating downgrade also factors in WDS's recent decline in operating performance on its core business, its high level of bad debt expense and geographic concentration in the state of California, which continues to face reimbursement pressures. Future earnings pressure is anticipated due to growth from expansion of the adult dental coverage under the state's DentiCal program, which has lower reimbursement rates. Furthermore, A.M. Best believes that WDS will be challenged to sustain its historic operating performance due to growth in lower margin business, increasing competition, as well as increased expense strain associated with revenue growth in opening De Novo offices.
Offsetting these factors are WDS's adequate risk-adjusted capital levels, which remain supportive of the ratings, long-standing market presence and conservative investment risk profile. WDS enjoys a strong market niche derived from its unique business structure tailored to low-middle income individuals with in-house financing capabilities. WDS continues to invest in its information technology infrastructure with full consolidation and centralization of core functions, as well as a multi-tiered collections process focused on immediate collections from members.
Following the downgrade, A.M. Best believes a positive rating movement for WDS is unlikely in the near to medium term. Key factors that could result in a negative pressure on the ratings include deterioration in operating performance; increase in financial leverage at PDSH or material decline in risk-adjusted capital levels. Additionally, increase in bad debt expense, further impairment of PDSH's goodwill or additional concern over meeting its debt covenants would place added pressure on WDS's ratings.
The methodology used in determining these ratings is Best's Credit Rating Methodology, which provides a comprehensive explanation of A.M. Best's rating process and contains the different rating criteria employed in the rating process. Best's Credit Rating Methodology can be found at www.ambest.com/ratings/methodology .
Key insurance criteria reports utilized:
- Evaluating Non-Insurance Ultimate Parents
- Rating Members of Insurance Groups
- Risk Management and the Rating Process for Insurance Companies
- Understanding BCAR for U.S. and Canadian Life/Health Insurers
This press release relates to rating(s) that have been published on A.M. Best's website. For all rating information relating to the release and pertinent disclosures, including details of the office responsible for issuing each of the individual ratings referenced in this release, please visit A.M. Best's Ratings & Criteria Center.
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