The syndication of Air Medical Group’s M&A financing package is struggling to take flight as concerns over high pro forma leverage and erratic industry trends weigh down investor enthusiasm, according to five buysiders tracking the deal.
The KKR-owned Air Medical Group is a provider of emergency air medical transportation services. The company this week is in the market with a B/B1 seven-year USD 1.455bn incremental term loan to help fund its carve-out acquisition of American Medical Response (AMR) from NYSE-listed Envision Healthcare. Air Medical is paying around USD 2.8bn for AMR, creating a combined company that would be the largest operator of ground ambulances in the US.
Financing also includes a privately placed CCC+/Caa1 eight-year USD 730m unsecured term loan as well as USD 335m of preferred equity from sponsors, as previously reported by Debtwire.
Lead bank Morgan Stanley opened price talk on the B/B1 rated incremental TLB at Libor+ 425bps-450bps (1% floor) with a 99 OID, according to a source close to the situation. Commitments are due next Tuesday (26 September) at 5pm ET.
The borrower is touting pro forma first lien leverage of roughly 4.6x though the new incremental TLB and around USD 1.9bn existing term loan debt, based on USD 731m of pro forma LTM adjusted EBITDA, according to two of the sources.
Including the new USD 730m unsecured term loan as well as Air Medical’s existing USD 370m 6.38% senior unsecured note due 2023 brings total debt to USD 4.5bn – implying leverage of approximately USD 6.2x, the sources added.
Meanwhile, discounting roughly USD 33m of marketed cost-saving synergies, pro forma leverage shakes out at around 5x on a first lien basis and 6.4x total, one of the sources said.
High opening leverage scared off some potential backers familiar with the air medical transportation business model, according to three of the sources. Criticism is focused on the sky-high fees charged by air ambulance providers per trip and unpredictable reimbursement rates, which diverge considerably between commercial payors and government-run insurance programs.
Roughly 38% of revenue from the combined company will come from Medicare and Medicaid, which reimburse at rates well below the cost of providing the services, according to an 8 September Standard & Poor’s report. As a result, Air Medical relies on inflated charges to commercial insurance providers – up to USD 50,000 per trip – which has sparked pushback from commercial payors unwilling to cover the full costs.
“Putting any leverage on this type of business is not a good idea, and this is a very highly leveraged business,” one source said.
Meanwhile, media reports of air ambulance providers aggressively pursuing patients over unpaid bills creates headline risk and threatens a government crackdown on the industry, one of the sources noted. In 2015, state authorities in Montana and Maryland opened investigations into the pricing practices air ambulance providers following a public outcry. Just this past April the Montana legislature debated a series of bills proposing greater regulation of the industry.
“A lot of people don’t like the air ambulance to begin with, there is a lot of scrutiny over pricing,” one of the sources said.
Fasten your seat belts
Other red flags weighing on syndication include an uptick during 1Q7 of the number of flights cancelled due to bad weather, according to two of the sources. This so-called weather cancellation rate increased year-over-year to around 23% of total trips, translating to an approximate USD 7m-10m hit to EBITDA, one of the sources said.
“There was more seasonality in the Air Medical business than some people expected,” the source added.
However, other potential lenders noted the acquisition of AMR’s ground transportation fleet helps the company diversify some of this weather-related volatility as well as the reimbursement risk from its air ambulance services.
Another data point that worried buysiders was a YoY decline in 1Q17 of same-base transports – a metric measuring organic flight volume growth, according to two sources.
“They missed 1Q17 numbers and people are concerned about that,” one sources said.
Pro forma liquidity consists of USD 25m cash on hand and access to its undrawn USD 275m ABL revolver, according the S&P report.
Assuming around USD 155m of capex needs, some prospective lenders estimate the company generating up to USD 200m of free cash flow (around 4.5% total debt) per year, one of the sources said.
Price guidance on Air Medical’s new broadly syndicated TLB is roughly in line with similarly levered Air Methods, whose B+/B1 USD 1.25bn L+ 350bps (1% floor) TLB due 2024 is quoted in the 96.969/97.563 context, for a 5.7% yield to three-year call, according to Markit.
By comparison the blended yield to three-call on Air Medical’s secured bank debt, based on current price talk, is 5.72%. The issuer’s existing term loan due 2022 is quoted in the 97.875/98.375 area, while is incremental L+ 400bps (1% floor) TL due 2022 is quoted in the 98.875/99.45 context, according to Markit.
The company, KKR, Morgan Stanley did not respond to requests for comment.