City MD expansion proceeds well, entails risks: S&P

  • Urgent-care chain expands rapidly
  • Risks include geographic concentration: S&P
  • Firm is increasing customer usage, maintaining margins

A strategy of rapid growth at City MD, the provider of urgent-care services largely in the New York City metro area, is proceeding well but entails “considerable” risk, Standard & Poor’s reported.

Analyst Matthew O’Neill assigned a B- corporate-credit rating and a stable outlook to what is formally WP CityMD Bidco LLC.

The analyst also rated B- the company’s senior secured credit lines, consisting of a $30 million revolving credit and a $225 million first-lien term facility.

City MD is recapitalizing as part of its acquisition by the private equity firm Warburg Pincus.

“The company’s debt burden is relatively high based on its size and cash EBITDA,” the analyst wrote in a May 12 report.

Providing immediate attention to medical issues, the chain operates 70 centers, mostly in New York metro and New Jersey. The figure includes three in Seattle in a joint venture with Catholic Health Initiatives, the Englewood, Colorado, healthcare system.

City MD’s business-risk profile is “vulnerable,” O’Neill said. The risks the analyst sees include the chain’s limited scale, geographic concentration, and limited market share in a fragmented sector.

These risks are partly offset by City MD receiving 80 percent of its revenue from commercial payers and lower cost compared with hospital emergency rooms, the analyst wrote.

City MD is quickly integrating new facilities, increasing customer usage and reimbursement at the new clinics and generally maintaining its “currently solid” EBITDA margins, the analyst wrote.

At the same time, as City MD expands to the outer NYC boroughs and the suburbs, those usage patterns could be tested and profitability could be hindered, O’Neill wrote.

“Additionally, acquisition multiples may rise” if the industry consolidates more quickly than it is now, “again reducing the return on investment,” the analyst wrote.

S&P estimates City MD’s adjusted leverage multiple at 7.2x for 2017 and 6.6x for 2018, and it expects the figure to stay above 5x generally.

What could hurt the analyst rating? A sustained narrowing of three percentage points or more in the EBITDA margin “and some fall-off in revenue growth.”

What could prompt an upgrade? City MD generating and sustaining reported EBITDA of $45 million to $50 million, “which would cover its lease and interest expense while also leaving some positive cash flow,” O’Neill wrote.

A higher rating also could be prompted if the company grows bigger in its markets while maintaining its EBITDA margins, the analyst wrote.

Warburg Pincus declined comment. A spokesman for City MD was unavailable for comment.

Action Item: View City MD’s service list:

The City MD branch at 561 Third Avenue, Manhattan, on Feb. 22, 2017. Photo by Buyouts Staff.