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Fitch Publishes Evex First-Time IDR of 'B+'; Outlook Positive
July 12, 2017 / 10:41 AM / 5 months ago

Fitch Publishes Evex First-Time IDR of 'B+'; Outlook Positive

(The following statement was released by the rating agency) LONDON/MOSCOW, July 12 (Fitch) Fitch Ratings has published Georgia-based healthcare provider JSC Medical Corporation Evex's (Evex) Long-Term Issuer Default Rating (IDR) of 'B+' with a Positive Outlook. The rating reflects Evex's leading market position in the Georgian healthcare market and its defensive revenues, which primarily come from state-funded healthcare programmes. This payor structure leads to long-term risks being correlated with the sovereign risk and with economic development in Georgia (BB-/Stable). The rating, however, is constrained by execution risks related to the company's ambitious investment strategy and its adherence to a conservative balance-sheet policy. The Positive Outlook reflects our expectation that the company's credit metrics will improve over 2017-2018 following finalisation of its sizeable capex programme and ramp-up of two newly renovated hospitals. This together with reduced execution risks and stronger free cash flow (FCF) generation could lead to a credit profile more consistent with a 'BB-' rating over the next 18 months. KEY RATING DRIVERS Largest Healthcare Provider in Georgia: The rating reflects Evex's strong market position as the largest healthcare provider in Georgia operating a network of hospitals and ambulatory clinics. Its business profile benefits from an established position with a 25% market share by number of beds as of April 2017, greater scale than its local competitors, the well-invested healthcare facilities in the country, and a good value proposition. This balances the company's small scale (2016 EBITDAR: USD35 million) compared with its international peers. Government Reimbursements Key Revenue Source: More than 70% of Evex's revenues stem from government reimbursements under state healthcare programmes and we expect no changes in payor mix over the medium term. High dependence on government reimbursement links Evex's revenues to state healthcare spending and ultimately to the country's GDP. Taking into account the positive outlook for government healthcare spending in Georgia, the ability of healthcare providers to set their own prices and the smooth reimbursement mechanism, we view reliance on government-funded healthcare programmes as positive for Evex's credit profile. Favourable Market Fundamentals: Fitch believes Evex's strong market position places the company well to benefit not only from market growth but also from its consolidation, as the market remains highly fragmented. Private healthcare is a relatively young industry in Georgia and operates under an evolving regulatory environment. We expect the sector to grow in the low teens over the medium term due to increasing demand and government healthcare spending. High Capex to Fall: Evex's financial profile has been impacted by continuing high capex as the company is renovating and upgrading its recently acquired hospitals, developing the network of ambulatory clinics and widening its service offer. We expect capex to be at around 30% of revenue in 2017, then falling to below 10% in 2018-2020 as the investment cycle completes. The rating assumes that these investments will be fully funded by operating cash flows and a portion of proceeds from a planned placement of a new five-year GEL90 million bond. Deleveraging Subject to Business Expansion: We expect Evex to improve its FFO fixed charge cover to around 5x (2016: 3.6x) and reduce FFO adjusted leverage to below 2x by 2020 (2016: 3.3x), which is the lowest among Fitch-rated industry peers. However, the rating incorporates execution risks as projected deleveraging is conditional upon more than 50% growth in Evex's 2016 EBITDA by 2020 (2016: GEL80 million), driven by ramping up volume and quality of services, something we feel is achievable under our forecasts in line with positive sector trends in Georgia. Strong EBITDA Margin: Evex has the highest EBITDA margin (2016: 33%) among Fitch-rated healthcare providers. There is a potential for further profitability improvement due to increasing capacity utilisation, centralisation of support functions as well as from growing contribution from ambulatory clinics segment that enjoys higher margins. However, we conservatively assume flat EBITDA margin at around 30% over 2017-2020, which is aligned with the management guidance. Reduced FX Risks: Evex has converted its US dollar loans from development banks (43% of debt at end-June 2017) into Georgian lari in 2017. As a result, its exposure to FX risks has fallen substantially as now more than 70% of Evex's debt is denominated in Georgian lari, matching the currency of its operating cash flows. Ring-Fenced Entity from GHG: The rating and the positive outlook assume that Evex remains ring-fenced from its parent Georgia Healthcare Group PLC (GHG) and sister companies as established in the agreements on long-dated loans from development banks. Any material loosening of the current arrangements, including any larger-than-expected upstreaming of dividends and/ or cash deployed for other GHG activities might be considered a negative rating event. DERIVATION SUMMARY Evex is smaller than its international peers, such as Fresenius Medical Care AG & Co. KGaA (BBB-/Stable), Universal Health Services, Inc. (BB+/Stable) and LifePoint Health, Inc. (BB/Stable), as it operates only in Georgia, which has a small economy. Nevertheless, the company's business profile is supported by Evex's leading market position, wide market share gap with its closest competitor, lack of visible threat from international players entering the market, and good growth opportunities. Evex's financial profile benefits from higher profit margins and a more conservative capital structure than industry peers. Evex's high dependence on government reimbursements links its revenues to state healthcare spending and ultimately to the sovereign risks of Georgia (BB-/ Stable). The rating, however, is constrained by execution risks related to the company's ambitious investment strategy. No Country Ceiling constraint or operating environment influence was in effect for these ratings. KEY ASSUMPTIONS Fitch's key assumptions within our rating case for the issuer include: -no reduction in government healthcare spending or adverse change in industry regulation; -double-digit revenue growth over 2017-2019 supported by ramp-up of renovated hospitals and increasing utilisation of other hospitals and low single-digit price increases; -EBITDA margin around 30%; -stable working-capital turnover; -no dividends until 2019, 40% payout thereafter; -no material debt-funded M&A or cash support to GHG or sister companies. RATING SENSITIVITIES Future Developments That May, Individually or Collectively, Lead to Positive Rating Action - Ramp-up of renovated hospitals and growth of existing business in line with business plan - EBITDA margin around 28%-30% - Evidence of FFO adjusted leverage decreasing towards 2x on a sustained basis - Free cash flow turning and remaining positive Future Developments That May, Individually or Collectively, Lead to Rating Downgrade - Reduction in government healthcare spending or regulatory action leading towards increasing revenue volatility or a reduction of profitability and cash-flow generation - FFO adjusted leverage increasing up to 3.5x on a sustained basis due to, for instance, weak operating performance or a more aggressive financial policy - FFO fixed charge coverage sustainably below 2.0x - Material debt-funded M&A by Evex or its parent GHG if funded by Evex Future Developments That May, Individually or Collectively, Lead to Revision of the Outlook to Stable - FFO adjusted leverage sustainably at 2.5x-3.0x due to slower-than-expected EBITDA growth or more aggressive financial policy - Adverse changes in regulatory environment LIQUIDITY New Bond to Strengthen Liquidity: At end-June 2017 available cash of GEL12.6 million was insufficient to cover GEL25.5 million in short-term debt and expected negative FCF. The company did not have any undrawn committed credit lines at end-June 2017. However, liquidity should be strengthened by issuance of local five-year GEL90 million bond. Proceeds will be applied to refinance certain loans from local banks and fund capex, which is partly scalable and is the major driver behind negative FCF. Contact: Principal Analyst Anna Zhdanova, CFA Associate Director +7 495 956 2403 Supervisory Analyst Frank Orthbandt Director +44 203 530 1037 Fitch Ratings Limited 30 North Colonnade London E14 5GN Committee Chairperson Pablo Mazzini Senior Director +44 203 530 1021 Summary of Financial Statement Adjustments Debt: Fitch treated loan provided to HTMC by its minority shareholder (2016: GEL5.8 million) as equity due to the absence of covenants, cumulative interest and intention to convert the loan into equity in 2017. Off-balance-sheet debt: Fitch added a GEL7 million guarantee provided for obligation of Evex's sister-company JSC GPC as an off-balance-sheet obligation. Media Relations: Adrian Simpson, London, Tel: +44 203 530 1010, Email: Additional information is available on For regulatory purposes in various jurisdictions, the supervisory analyst named above is deemed to be the primary analyst for this issuer; the principal analyst is deemed to be the secondary Applicable Criteria Criteria for Rating Non-Financial Corporates (pub. 10 Mar 2017) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here Solicitation Status here#solicitation Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. 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