OREANDA-NEWS. S&P Global Ratings today affirmed its 'B' corporate credit rating on Louisville, Colo.-based Global Healthcare Exchange LLC (GHX). The outlook remains stable.

In addition, we affirmed our 'B' rating to GHX's secured first lien credit facility, but revised our recovery expectation in this debt to '3' from '4'. The '3' recovery rating indicates expectations for meaningful recovery (50%-70%, lower half of the range) in the event of a payment default. At the same time, we assigned a 'CCC+' rating to GHX's proposed second-lien term loan. The recovery rating on this debt is '6', indicating expectations for negligible (0%-10%) recovery in a default.

The revision to the first-lien recovery expectations reflects our modestly revised enterprise value at default and the significant cushion provided by the second lien.

We view GHX's proposed dividend as credit neutral, due to the retirement of preferred stock that we treat as debt. The transaction is a debt-for-debt refinancing by our calculations, with an immaterial increase in adjusted leverage in our forecast for fiscal year-end 2016--though funded debt to EBITDA does increase to 7.3x from 5.5x. The incremental interest burden from the added debt is not significant enough for us to change our view of GHX's financial risk, given the company's solid cash flow generation and relatively strong interest coverage metrics. From an operations standpoint, GHX's revenue and EBITDA continue to grow in line with our expectations.

"GHX's relatively small scale and narrow business focus on cloud-based supply chain automation solutions to the health care industry are mitigated by its diverse customer base and predictable revenue stream," said S&P Global Ratings credit analyst Maryna Kandrukhin. We view the business as a service rather than one based on a proprietary information technology platform. While the company processes considerable dollar volume and is a leader in this niche, the health care Software as a Service (SaaS) market has very few barriers to entry that would prevent a larger competitor from expanding further into cloud-based exchange services and providing better solutions to GHX's customers. We view the services that GHX provides as vulnerable to unforeseen shifts in supply chain technology that could threaten the value-added benefits of the business model.

The stable outlook reflects our expectation that mid - to high-single-digit organic revenue growth and stable margins will result in continued free cash flow generation, despite our expectation that high leverage will persist over the next one to two years.

We could lower the rating if competitive threats result in an unexpected shortfall in contract renewals and contract price pressures that result in margin contraction to the point that free cash flow could drop below $5 million. Such an occurrence could change our perception of the strength of GHX's business model and lead us to revise downward our business risk assessment. We see a downgrade related to operational missteps as unlikely, given currently high margins that provide some downside cushion to the rating.

Although unlikely, we could raise the rating if adjusted leverage declines to less than 5x and we believe the company's financial policy is committed to maintaining leverage at that level. This would require adjusted debt to be reduced by at least $346 million.