TEXT-S&P rates Fresenius senior secured facilities 'BBB-'
Dec 10 - Standard & Poor's Ratings Services today said it assigned its 'BBB-' issue rating to the proposed EUR2.25 billion equivalent senior secured debt facilities to be borrowed by Fresenius SE & Co. KGaA (FSE; BB+/Stable/--), Fresenius Finance II BV, and Fresenius US Finance I Inc. At the same time, we assigned a recovery rating of '2' to the proposed facilities, reflecting our expectation of substantial (70%-90%) recovery for debtholders in the event of a payment default. In addition, we affirmed our 'BB+' issue rating on FSE's senior unsecured, guaranteed debt facilities. The recovery rating on this debt remains unchanged at '3', reflecting our expectation of meaningful (50%-70%) recovery for debtholders in the event of a payment default. Finally, we affirmed our 'BB-' issue rating on FSE's EUR300 million euro notes. The recovery rating on this debt remains unchanged at '6', reflecting our expectation of negligible (0%-10%) recovery for debtholders. The issue and recovery ratings on the existing senior secured debt remain unchanged at 'BBB-' and '2', respectively, although we expect to withdraw these ratings on completion and drawdown of the proposed debt facilities. The ratings on the proposed debt facilities are subject to our review of the final documentation. The proposed refinancing leads to a significant potential increase in the amount of senior secured debt in the capital structure (assuming full drawings on the revolving credit facilities ). Nevertheless, recovery prospects for the proposed facilities would, in our view, remain above 100%, and benefit from a material simplification of the collateral structure compared with the existing senior secured facilities. However, the recovery rating of '2' on the proposed (and existing) facilities reflects our view that their structural and contractual seniority, and the recovery value available, would unlikely be sufficient to support, in line with our criteria, any upward notching of the issue rating in the event that we raise the corporate credit rating on FSE to 'BBB-'. (For more details, see "2008 Corporate Criteria: Rating Each Issue," published April 15, 2008.) The subordination of the senior unsecured notes means that we view recovery prospects for these instruments as more volatile than for the senior secured debt. Although we maintain a recovery rating of '3' on the unsecured notes, the proposed senior secured facilities make provisions for significant levels of incremental debt. This, in our view, leaves the unsecured notes exposed to lower recovery prospects if FSE uses the flexibility under the senior secured facilities' documentation to increase the proportion of secured debt in the capital structure. However, any increase is subject to a limitation on senior secured debt leverage at the point of incurrence. We understand that FSE will use the proposed facilities to meet debt maturities, including refinancing existing commitments under its senior secured RCF and term loan A. The documentation provides for additional issuance (currently uncommitted) under a term loan B, which FSE will utilize to refinance commitments under the existing senior secured term loan D. We understand that FSE can only draw on the proposed facilities on full refinancing of the existing senior secured facilities, including term loan D. RECOVERY ANALYSIS The proposed facilities have direct security from share pledges over and guarantees from Fresenius Kabi, as well as a guarantee from Fresenius ProServe GmbH. We consider the security package to be relatively weak, albeit somewhat less complex than that for the existing senior secured facilities. The documentation for the proposed facilities provides for the refinancing of the existing term loan D, as well as providing significant flexibility for additional indebtedness to be incurred under certain circumstances. The facilities also benefit from interest coverage and total leverage financial maintenance covenants. Our simulated default scenario envisages distressed operations at: -- Fresenius Kabi, stemming from increased competition for key products including Heparin, and delayed intravenous drug launches; -- Fresenius Helios, due to some hospital acquisitions, which we assume Fresenius Helios would not be able to make profitable fast enough; and -- Fresenius Vamed, although to a lesser extent than at Fresenius Kabi and Fresenius Helios. We have revised our year of default to 2018, from 2015, assuming that FSE is unable to refinance the senior secured facilities due that year. At the point of default, we assume that EBITDA would have declined to EUR694 million, higher than our previous assessment of EUR530 million. Based on an EBITDA multiple of 6.5x, our stressed enterprise value is EUR4.5 billion, which we adjust upward to EUR5.0 billion to account for a stressed valuation of FSE's stake in Fresenius Medical Care. From this, we deduct enforcement costs of EUR350 million and priority liabilities totaling EUR699 million, leaving EUR3.7 billion available for the secured creditors. Assuming EUR2.2 billion of senior secured debt outstanding at default, there is sufficient value for full recoveries, with the surplus available to the senior unsecured notes. We assume EUR1.6 billion of unsecured notes outstanding at the point of default. Thereafter, there is negligible value for the EUR300 million euro notes due 2014, which we assume will be refinanced on similar terms. Although coverage on the senior unsecured notes is nominally higher than 70%, we cap the recovery rating on these instruments at '3' in accordance with our criteria for rating unsecured debt. RELATED CRITERIA AND RESEARCH -- Fresenius SE & Co. KGaA Recovery Rating Profile, April 11, 2012 -- Criteria Guidelines For Recovery Ratings On Global Industrial Issuers' Speculative-Grade Debt, Aug. 10, 2009 RATINGS LIST Ratings List New Rating Fresenius SE & Co. KGaA Senior Secured Debt BBB- Recovery Rating 2 Ratings Affirmed APP Pharmaceuticals LLC Senior Secured Debt* BBB- Recovery Rating 2 Fresenius Finance B.V. Senior Unsecured Debt* BB+ Recovery Rating 3 Subordinated Debt* BB- Recovery Rating 6 Fresenius Finance I S.A. (Luxembourg) Senior Secured Debt* BBB- Recovery Rating 2 Fresenius U.S. Finance I Inc. Senior Secured Debt* BBB- Recovery Rating 2 Fresenius U.S. Finance II Inc. Senior Unsecured Debt* BB+ Recovery Rating 3 *Guaranteed by Fresenius SE & Co. KGaA Complete ratings information is available to subscribers of RatingsDirect on the Global Credit Portal at www.globalcreditportal.com. All ratings affected by this rating action can be found on Standard & Poor's public Web site at www.standardandpoors.com. 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