Pathway Vet Alliance LLC

The stable outlook reflects our expectation that Pathway will continue generating acquisition-driven, 10%-15% revenue growth in 2022, and that its EBITDA margin will remain in the low-20% area, allowing the company to generate free operating cash flow. We also expect the company's aggressive, debt-financed growth strategy will cause sustained leverage above 6x through 2022. We could lower the rating if the company's organic revenue declines at a low-single-digit-percentage rate and if planned acquisitions are nonaccretive, leading to shortfalls to our base-case projections on revenue growth and EBITDA margins. We could also consider lowering the rating if we expect discretionary cash flow to debt will be in the very-low-single-digit-percent range. Although highly unlikely, we could consider an upgrade if the company

...Leverage likely to remain high due to debt-financed acquisitions. Pathway Vet Alliance LLC is owned by private equity firm, TSG Consumer Partners, and we expect financial policy will remain aggressive. We expect the company to remain acquisitive and for adjusted debt to EBITDA to be low-7x for 2021 and decrease to high-6x in 2022. We continue to view the veterinary operating industry as highly attractive because of secular tailwinds, significant consolidation opportunities to increase scale, and favorable payment dynamics. Pet ownership continues to increase in the U.S., and owners are spending more on animal health. We believe most of the practices in the U.S. are independently owned, providing ample targets for Pathway's acquisition-driven growth strategy. Veterinary services are primarily cash pay, thus veterinary operators lack the reimbursement risk of other health care service providers....

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