USIS fraud charge a fresh distraction for Providence company Altegrity: UPDATE

The government accused United States Investigations Services Inc (USIS), the largest private provider of security checks for the government and a unit of Altegrity, of overcharging by millions of dollars through improper background verifications, according to court documents and a report by sister news service Reuters. 

Between March 2008 and September 2012, USIS allegedly filed at least 665,000 improper background checks amounting to about 40 percent of total submissions, according to a Jan 22 court filing by the Justice Department. The government’s payments to USIS ranged from $95 to $2,500, depending on the type of background investigation. The U.S. requested a jury trial to determine damages and penalties.

“At this point it’s very uncertain what the magnitude or the timing will be on litigation, so it’s tough to point to a concrete impact on Altegrity’s debt,” Brian Milligan, a credit analyst at Standard & Poor’s, said in a phone call. ”Qualitatively, given where the company has been – outside of this litigation – they already have a lot to focus on and this is one more distraction. This…certainly is a negative development.”

Separately, Milligan on Jan.28 downgraded Altegrity’s debt for the second time in about a year. The current outlook is negative “because a debt restructuring appears inevitable within the next six months,” Milligan said in his latest note. Altegrity has hired Evercore to help it address $1 billion of outstanding bank debt that matures in February, 2015, and other debt issues, he said. 

Both S&P and Moody’s also cut Altegrity’s debt last year.

Moody’s noted in April, 2013, that Altegrity faced challenges at its USIS unit stemming from government cutbacks, but added that near-term liquidity was expected to be adequate.

”We expect debt/EBITDA to remain well above 7x over the next 12-18 months,” Moody’s said. “The ratings could be upgraded if USIS is able to significantly grow revenue and EBITDA and the commercial segments continue to expand margins, so that the ability to sustain the capital structure becomes more likely.”

A spokesman for Providence Equity Partners declined to comment on Altegrity or the fraud charges against USIS.

In a prepared statement, USIS said the allegations “relate to a small group of individuals over a specific time period and are inconsistent with the strong service record we have earned since our inception in 1996.”

USIS said it learned of the allegations nearly two years ago and it has since “acted decisively to reinforce our processes”, including appointing a new leadership team and enhancing its oversight procedures. USIS said it has fully cooperated with the government’s investigation.

Providence Equity Partners bought Altegrity from Carlyle Group and Welsh, Carson, Anderson & Stowe for $1.5 billion in 2007, during a time of lofty valuations and enthusiasm on the part of private equity firms that cyber defense and intelligence would remain safe from possible government cuts.

Altegrity attempted to sell its HireRight division for up to $1 billion last year, according to a Reuters report, but no deal has taken place as of yet.

Ilan Nissan, a partner at Goodwin Procter, said despite the dispute over the USIS background checks, the practice itself remains as important as ever for private equity firms purchasing portfolio companies.

“The USIS story calls into question the veracity and completeness of background checks and it highlights that they need to be done by the right people with the right credentials,” he told Buyouts. “As lawyers, we build all kinds of protections into M&A documents, but if you’re dealing with the wrong people, the deal documents may be very difficult and expensive to enforce. Background checks are really important as a tool to spot trouble with a deal.”

(This story had been updated to include the Jan. 28 debt downgrade by S&P.)