Emergency transportation provider, Rural/Metro Corporation, on July 15, 2013 missed an interest payment on its senior notes due 2019 that were sold to pay for the acquisition, according to Moody’s Investors Service. The company was bought by Warburg Pincus LLC in 2011 for $728 million in cash and debt.
The private ambulance firm serves millions of people who need 911 services in rural areas of Maricopa, Pima, and Pinal counties as well as in 20 other states. Rural/Metro provides emergency and non-emergency medical transportation, fire protection, airport fire rescue, and home healthcare services in approximately 700 communities.
The services are provided under contract with government entities, hospitals, healthcare facilities and other healthcare organizations. Net revenue for the twelve months ended March 31, 2013 was approximately $664 million. “This credit negative event would cause a default under the 10.25% senior notes indenture if the interest payment is not made within the 30-day grace period,” according to Moody’s.
The company, which also has been struggling with declining payments from patients, will default unless it makes the $15.6 million payment within a 30-day grace period.
According to the Wall Street Journal, “Rural/Metro’s fast descent into financial distress underlines the perils of debt-fueled buyouts, even in recent years when low interest rates have enabled many companies to cut the costs of debt and push back due dates. Default is always a risk in leveraged buyouts because acquirers boost the debt loads of the companies they buy to help pay for them. But it is uncommon for a deal to teeter so quickly.”
If it defaults, Rural/Metro would be the only leveraged buyout completed in 2011 to do so and the biggest since that time, according to Moody’s.
Since the acquisition, Scottsdale, Ariz.-based Rural/Metro has been squeezed between higher debt expenses and declining revenue as the amount it gets paid for transporting patients by insurers or the patients themselves has dropped, according to Moody’s.
The Wall Street Journal reports that it is “unclear how, if at all, a default would affect customers, some of whom are in rural areas without many other options for ambulance service.” Indiana’s Union County auditor, Gene Sanford told the WSJ, that if Rural/Metro’s financial problems affect its services, “that’s a real problem” because Rural/Metro is the only ambulance operator serving the rural area.
Ambulance operators can’t deny emergency transport to uninsured patients, and persistently high unemployment has boosted the number of uncompensated trips Rural/Metro makes, according to Moody’s. At the same time, the difference between what the company charged patients and what insurers have been willing to pay has risen, Moody’s said.
In 2010, the company collected 48 cents on every dollar of ambulance service it provided, according to public filings. The figure declined to 39 cents in 2012 and to 33 cents in the nine months through March 31, Moody’s said. Moody’s also said Rural/Metro changed its accounting for payments this year, resulting in a $35 million decline in net revenue. Rural/Metro declined to comment on its financial performance.
“As Rural/Metro continues to align its operations and capital structure, the company’s ratings already consider our view that Rural/Metro’s creditors may not fully recover the face value of their holdings.
The ratings are not immediately impacted. However, Moody’s could change the probability of default rating to “D” or append with an “LD”, denoting a default or a limited default, based on developments during the 30-day grace period and the resolution of the missed interest payment on the senior notes. The corporate family rating could also be downgraded. Any subsequent upgrade would require a meaningful reduction in the company’s debt balances,” according to Moody’s.
Rural/Metro was started by Lou Witzeman, a newspaper reporter, who saw his neighbors destroyed by near his home just outside the city limits of Phoenix, Arizona in 1948. Because there was no fire department established for the area, Witzeman purchased a fire engine and proceeded to go door to door asking residents to subscribe to the new fire service by paying an annual membership fee.
Rural Meytro currently serves the following communities/fire districts:
Amado
Apache Junction Fire District
Arizona City
Avondale
Carefree
Casa Grande
Catalina Foothills
Cave Creek
Chandler
Coolidge
El Mirage
Florence
Fort Thomas
Fortuna Foothills
Fountain Hills
Gadsden
Gilbert
Glendale
Goodyear
Graham County Green Valley
Guadalupe
Hidden Valley Fire District
Johnson Ranch/San Tan
Litchfield Park
Mammoth
Marana
Maricopa County
Martinez Lake
Mesa
Mount Lemmon
Mountain Vista Fire District
Northwest Fire District
Oracle
Oro Valley
Palo Verde
Paradise Valley
Peoria
Pima
Pima County
Pinal County
Queen Creek
Sabino Vista Fire District
Safford
Sahuarita
San Luis
San Manuel
San Tan Valley
Scottsdale
South Tucson
Sun City
Surprise
Tanque Verde Fire District
Tempe
Tolleson
Tucson
Tucson Country Club Estates Fire District
Yuma
Yuma County