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Fitch Rates Fresenius Finance Ireland Bonds at 'BBB-'; Affirms Fresenius at 'BBB-'
March 23, 2017 / 1:09 PM / 9 months ago

Fitch Rates Fresenius Finance Ireland Bonds at 'BBB-'; Affirms Fresenius at 'BBB-'

(The following statement was released by the rating agency) LONDON, March 23 (Fitch) Fitch Ratings has assigned Fresenius Finance Ireland PLC's (FFI) EUR2.6 billion guaranteed senior notes an instrument rating of 'BBB-'. It has also affirmed Fresenius Medical Care AG (FMC) & Co. KGaA and Fresenius SE & Co.KGaA's (FSE, together Fresenius) Long-Term Issuer Default Rating at 'BBB-'. The Outlook is Stable. A full list of rating actions is at the end of this commentary. KEY RATING DRIVERS Market-leading Healthcare Operations: Fresenius's ratings remain underpinned by a defensive and diversified business model, created by a selective portfolio of market-leading healthcare operations. The portfolio's increasing scale and diversification is translating into strong profitability and cash generation as demonstrated by FY16 financial results and the increased sales and profit outlook for 2017. In addition, Fitch views the underlying operations as mature and defensive with low cyclicality and volatility of earnings. In this context, we view the Quironsalud acquisition as further evidence of Fresenius acting as an active consolidator in the sector. As Fresenius primarily funds expansion with debt, its financial profile - particularly leverage ratios - remain stretched for its rating. However, Fitch views positively the strict application of financial policies and satisfactory operating cash generation, which gives the company the ability to delever in case of need, which underpins the Stable Outlook. Quironsalud Acquisition Neutral for Rating: The Quironsalud transaction will use headroom available under the rating despite being predominantly debt-funded, Fitch estimates consolidated funds from operations (FFO) adjusted net leverage upon completion to peak at around 4.0x in 2017, comfortably within our negative rating sensitivity of 4.5x. The manageable leverage post-acquisition will be helped by EUR400m of new Fresenius shares that have been issued to finance part of the transaction, as well as the defensive and resilient operational qualities of the acquired business. Fitch expects Quironsalud to be cash-generative and earnings-accretive for Fresenius, supporting a smooth deleveraging path over the rating horizon. Fitch forecasts net debt-to-EBITDA will return inside Fresenius's long-term leverage guidance of 2.5x-3.0x within 18 months of completion. Fitch also projects FFO fixed charge cover will remain comfortably above 3.0x, fully consistent with a 'BBB-' rating. Debt Recoveries and Instrument Ratings: Fitch no longer differentiates the instrument ratings and aligns senior secured and senior unsecured ratings at 'BBB-'. This is because we expect priority ranking financial debt will not exceed 1.5x of EBITDA and hence not be sufficiently material to warrant a differentiation of the senior secured and senior unsecured instrument ratings. Consequently we have assigned an instrument rating of 'BBB-' to the new senior notes issued by FFI to finance the Quironsalud acquisition. The senior unsecured rating of 'BBB-' reflects our expectation that future refinancing will favour unsecured creditors, lowering the proportion of secured or priority financing, further reducing structural and contractual subordination within Fresenius's capital structure. Mature Operations, Defensive Revenues: Fitch believes the underlying revenue streams of the four business segments are defensible and correlated with the general positive healthcare industry trends. These are characterised by an ageing population, increase in chronic diseases and improving access to healthcare. However, this is counterbalanced by the growing pressure on healthcare budgets in times of austerity. We identify this as a key risk for Fresenius as its operations are predominantly exposed to developed markets (US and Europe) where issues around healthcare costs and productivity are most pressing. Acquisitions To Continue, Financial Policies Unchanged: In line with the company's financial policies (targeting net debt/EBITDA of 2.5x-3.0x), we note that Fresenius continues to increase its flexibility to further explore growth through acquisitions. We believe these will increasingly be bolt-on and synergistic in nature rather than strategic. We consider future acquisitions could temporarily stretch financial leverage for the rating. However, this should be mitigated by the defensive and resilient qualities of the underlying businesses creating significant deleveraging ability for the group, which also supports the Stable Outlook. DERIVATION SUMMARY The 'BBB-' IDR balances Fresenius's strong business risk profile, with a financial structure that based on Fitch's leverage metrics, would be consistent with a lower rating. Fresenius stands out by its much larger size and stronger business diversification against other Fitch-rated 'BBB-'/'BBB' companies in the healthcare space with an equally solid, if not stronger, geographical diversification than peers. We acknowledge the absolute level of profitability is not a differentiating factor, but the resilience of earnings and cash flow through the cycle is at least equal to peers. These elements compensate for Fresenius's more aggressive financial metrics and financial policy than close peers. KEY ASSUMPTIONS Fitch's key assumptions within our rating case for the issuer include: - Quironsalud acquisition to be fully consolidated from 1 February 2017. Enhancing earnings and generating cash flows - Underlying growth in patient volumes as well as the built out of Care Coordination at FMC offsets on-going reimbursement rate pressure - Ongoing efficiency measures mitigate margin erosion due to rising cost of care - Bolt-on acquisitions of up to USD400m per year at FMC; no larger strategic acquisitions assumed, which Fitch considers event risk - Low to mid-single digit revenue growth at Kabi and Helios; high single digit at Vamed - Group EBITDA margin of around 18%-19% - Capex of 5%-6% of sales per year - Cash at FMC not readily available for debt service at FSE (other than via dividends) - Consolidated approach under Fitch's Parent-Subsidiary Rating Linkage criteria RATING SENSITIVITIES Future Developments That May, Individually or Collectively, Lead to Positive Rating Action Fitch views an upgrade unlikely in the near term, given Fresenius's publicly stated financial policies. An upgrade could be considered if the rating profile evolves towards: - FFO adjusted net leverage below 3.5x - FFO fixed charge cover above 4.0x - Both ratios on a sustainable basis, while maintaining continued profitable and cash-generative operations. Future Developments That May, Individually or Collectively, Lead to Negative Rating Action - Regulatory action leading towards increasing revenue volatility and negative effects on profitability and cash flow generation with EBITDAR margin under 19% (FY16: 22%) and FCF margin reducing to below 2.0% (FY16: 3.8%) - FFO adjusted net leverage expected to move sustainably above 4.5x (and FFO fixed charge cover to remain at or below 3.0x (FY15: 3.4x) either due to acquisitions and/or changes to financial policies or sustained deteriorating in operating environment. LIQUIDITY Adequate Liquidity. The group has unutilised committed credit facilities available of EUR3.9 billion (of which around EUR1.7billion is available at the FMC level), in addition to estimated EUR900 million of cash, which Fitch considers as readily available for debt repayment at the FSE level as of December 2016. We expect positive FCF generation in excess of EUR1 billion per year to continue for the next four years. Capital Structure Considerations. Fitch views the linkage between FMC and FSE as strong given the consolidation of FMC, management control, shared finance function (albeit no cash pooling, no shared financial obligations or mutual guarantees) and some cross default provisions from FMC to FSE. We therefore apply the IDR to the consolidated group, reflecting both entities' similar financial profiles and guidelines. FULL LIST OF RATING ACTIONS FSE Long-Term IDR: affirmed at 'BBB-'; Outlook Stable Senior unsecured debt: affirmed at 'BBB-' Senior secured debt: affirmed at 'BBB-' Short-Term IDR/Commercial Paper rating: affirmed at 'F3' Fresenius Finance Ireland PLC: Guaranteed senior notes: assigned 'BBB-' Fresenius Finance II B.V.: Senior secured debt: assigned 'BBB-' Fresenius US Finance I Inc.: Senior secured debt: assigned 'BBB-' Fresenius US Finance II Inc.: Guaranteed senior notes: affirmed at 'BBB-' FMC: Long-Term IDR: affirmed at 'BBB-'; Outlook Stable Senior unsecured debt: affirmed at 'BBB-' Senior secured debt: affirmed at 'BBB-' Short-Term IDR: affirmed at 'F3' Contact: Principal Analyst Quentin Dumouilla Analyst +44 20 3530 1790 Supervisory Analyst Frank Orthbandt Director +44 20 3530 1037 Fitch Ratings Limited 30 North Colonnade London E14 5GN Committee Chairperson Pablo Mazzini Senior Director +44 20 3530 1021 Summary of Financial Statement Adjustments - -Lease capitalisation: we apply a blended capitalisation multiple of 6.4x instead of 8x to reflect the exclusion of annual operating lease charges relating to an estimate of short-life assets. The full lease amount is however included in our FFO fixed charge cover computation. -Readily available cash: Fitch considers cash held at FMC (approximately EUR500m) as restricted for debt service at FSE as this would need to be up-streamed through dividends. As cash management for healthcare operators does not have pronounced seasonal cycles, Fitch does not make further adjustments to the group's readily available cash. Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com. Additional information is available on www.fitchratings.com. 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 Recovery Ratings and Notching Criteria for Non-Financial Corporate Issuers (pub. 21 Nov 2016) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here _id=1020978 Solicitation Status here 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. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. 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