Welsh Carson puts $30 mln into Smile Brands, but debt woes loom

Although Welsh, Carson, Anderson & Stowe recently infused $30 million of equity into its platform company Smile Brands Group Inc, the operator of 330 dental offices in 17 states may not meet its loan covenants in 2017, Moody’s analysts said.

Although the support of its sponsor remains “solid,” the Irvine, California, company’s adjusted debt-to-Ebitda multiple of at least 10x may pose a “high likelihood of debt impairment,” Moody’s analyst Daniel Goncalves said in a note to clients.

“While the company’s earnings erosion will stabilize due to cost cutting initiatives, financial leverage will likely remain very high and interest coverage and free cash flow weak,” Goncalves said on April 29. “This creates a high degree of uncertainty whether the company can sustain its existing capital structure.”

A spokeswoman for Smile Brands did not answer an email. A Welsh Carson spokeswoman declined to comment.

Along with the equity infusion from Welsh Carson, the company won an amendment and waiver from its lenders that call for Smile Brands to pursue alternative financing and consider selling assets to help pay off debt by the end of 2016.

The amendment, which closed in October, converted $42 million of revolver borrowings into term-loan borrowings. But the measure “does not provide covenant relief beyond this period, and we believe the company could breach its financial covenants in early 2017,” Moody’s said.

Smile’s credit agreement is secured by substantially all the company’s assets, “limiting its ability to generate additional liquidity through asset sales,” Moody’s said.

Moody’s downgraded its rating for Smile Brands’ senior secured bank credit facilities to Caa2 from Caa1. Debt rated Caa is considered speculative of poor standing and subject to very high credit risk, according to Moody’s definitions.

The company’s outlook is stable, which reflects Welsh Carson’s support, Moody’s said.

Smile Brands has access to an $8 million revolver, “leaving minimal availability considering outstanding letters of credit,” Moody’s said.

The company’s unsecured notes mature December 2019, its term loan matures in August 2019 and its revolver expires August 2018.

With annual revenue of $470 million, Smile Brands provides business support services, non-clinical personnel, facilities and equipment to dentists.

Welsh Carson paid an undisclosed sum to Freeman Spogli & Co for Smile Brands in a deal announced in late 2010. 

Action Item: Smile Brands, http://www.smilebrands.com/

 Photo ©iStock/Spaceliner