One Equity’s holding MModal declared in default

Franklin, Tennessee-based MModal Inc, the largest clinical transcription service in the United States, missed a scheduled interest payment last week, and credit rating agency Standard & Poor’s Financial Services promptly declared the company in default, although the debtor has a 30-day grace period to make the payment.

“The downgrade reflects Standard & Poor’s view that the missed interest payment on the unsecured notes, due Feb. 18, 2014, constitutes a default under our criteria,” said credit analyst David Tsui. S&P said chances are ” negligible” for creditors to make a recovery in the event of a payment default, but it also said it would would review and raise the rating if MModal makes the interest payment within the 30-day grace period, or upon completion of a debt restructuring.

S&P said the MModal default is the first of the year in the United States and the third globally, following defaults so far this year in Kazakhstan and Poland. At this point last year, S&P had recorded 13 defaults, including nine in the United States, three in Europe and one in the emerging markets.

“At this time no determination has been made by MModal to not pay such scheduled interest payment within the 30-day grace period. During this period we fully expect to operate in our normal course of business and to continue providing our customers the high level of support they have come to expect,” the company said in a prepared statement provided Monday to Buyouts. “MModal has solid revenue, strong operating margins, cash flows consistent with industry norms, a large customer base, and we are continuing to invest in the future. Our operations are strong and we are generating exceptional quality metrics and high customer satisfaction.”

MModal declined to comment beyond its prepared statement. One Equity Partners, which is a unit of unit of JPMorgan Chase & Co, also declined to comment.

One Equity Partners took MModal private in August 2012, following a tender offer that valued the company at $14 per share, or about $1.1 billion. The firm financed the deal with a $440 million LBO term loan B and a $75 million senior secured revolving credit, according to sister service Thomson Reuters Loan Pricing Corp, which tracks the credit market. That would indicate a fairly rich sponsor contribution of 47 percent of the purchase price, Buyouts calculated.

But the company seemed to run into financial difficulty fairly quickly. Moody’s Investors Service Inc, which has not weighed in on last week’s missed payment, downgraded MModal last October, reducing its “corporate family rating” to Caa1 from B3 and cutting the individual tranches commensurately, with a negative ratings outlook. In Moody’s rating system, B rated obligations are considered speculative and are subject to high credit risk, while Caa obligations are judged to be of poor standing and are subject to very high credit risk.

Moody’s cited expectations for further declines in MModal’s revenue and negative free cash flow, with debt to EBITDA above 8x, as factors that led to the downgrade. MModal has had declines in its transcription outsourcing services and slower than expected new technology sales, which primarily serves the U.S. healthcare industry, while high interest and cash restructuring costs will drive negative free cash flow, Moody’s said at the time.