TEXT - S&P rates Rede D'Or Sao Luiz S.A.
(The following statement was released by the rating agency) Overview -- Rede D'Or Sao Luiz has gained a leading position in Brazil's hospital management industry thanks to recent acquisitions, which have also resulted in sizable debt. -- We are assigning our 'BB-' corporate credit rating to Rede D'Or. -- We are also assigning our 'BB-' global scale and 'brA-' national scale rating to the company's debentures of up to R$270 million. -- The stable outlook reflects our expectation that the company will rapidly improve its credit metrics while it consolidates operations. Rating Action On Jan. 14, 2013, Standard & Poor's Ratings Services assigned its 'BB-' corporate credit rating to Rede D'Or Sao Luiz S.A. (Rede D'Or). At the same time, we have assigned our 'BB-' global scale and 'brA-' national scale rating to the company's debentures of up to R$270 million. The outlook is stable. Rationale The ratings on Rede D'Or reflect our view of the company's "fair" business risk profile, "aggressive" financial risk profile, and "adequate" liquidity. Our assessment of Rede D'Or's "fair" business risk profile recognizes the company's leading position in Brazil's private hospital market, as well as its efficient operations and positive track record in turning over acquired assets. However, its limited geographic diversification and revenue concentration in its five largest hospitals offset these strengths. In our analysis, we also consider the favorable fundamentals in Brazil's health care industry, including the ongoing growth in private health insurance coverage, which currently serves only 25% of country's population. Rede D'Or has no exposure to government reimbursements and a significant portion of its revenues comes from five large healthcare plans which assure revenue and cash flow predictability. In our view, the company's operations are efficient. Rede D'Or's long established hospitals have maintained occupancy rates of near 80%. Furthermore, thanks to several acquisitions in the past few years, the company has achieved efficiency gains as a result of both higher economies of scale for the acquisition of hospital materials and medication and the process improvements in the acquired hospitals. We expect Rede D'Or to expand its operations organically in the next few years as it integrates its recently acquired hospitals and benefits from the resulting stronger cash generation. The company has improved its profitability as it completes the integration of its acquisitions. We expect its profitability to further increase due to Rede D'Or's improved mix of services, as its hospitals perform more complex procedures that command higher average fees. We assess Rede D'Or's financial risk profile as "aggressive." The company's current credit metrics reflect a "highly leveraged" financial risk profile, according to our criteria, as Rede D'Or increased its debt for recent acquisitions. However, we believe the company has the ability to rapidly consolidate these acquisitions and consequently strengthen its cash generation and credit metrics by the end of 2013, which would be in line with an "aggressive" financial risk profile assessment. Rede D'Or's smooth debt profile, with no significant debt maturities until 2015, is also a mitigating factor. On a pro forma basis for the company's acquisitions in 2012, our base-case scenario considers a revenue growth of about 40%, primarily due to its acquired hospitals, which added about 700 new beds during 2012. From 2013 onwards, we expect an average annual revenue growth of 15%-20%, based mainly on internal expansion, with the company's portfolio increasing to about 5,000 hospital beds by 2015. Under our assumptions, which incorporate increasing occupancy rates, diversification of services, and gains of scale, Rede D'Or may post EBITDA margins of about 20% over the next few years. The company has issued new debt in anticipation of the cash disbursement for acquisitions and as a result, has retained higher cash levels at certain times. If the acquisitions are not completed according to the original schedule, resulting in lower-than-expected revenues and cash generation, we do not expect this to harm the rating as long as company maintains its current net leverage metrics. We expect Rede D'Or's total adjusted debt to EBITDA to be 5.5x-6.0x and funds from operations (FFO) to debt of about 14% by December 2013, significantly stronger than 9.6x and 11.8%, respectively, in 2011. We also expect Rede D'Or to post a net debt to EBITDA of about 4x and FFO to net debt of 20% by December 2013. Liquidity We believe that Rede D'Or has adequate sources of liquidity to cover its needs in the near term. Our assessment of the company's liquidity profile incorporates the following assumptions: -- Sources of liquidity will exceed uses by more than 1.5x during the next 12 months; -- Net sources of liquidity should remain positive, even if EBITDA declines by 15%; -- A limited cushion to comply with financial covenants by year end 2012, but the cushion will improve in 2013 and beyond; and -- Sound relationships with banks in Brazil. The company's liquidity sources include its cash position of R$1.1 billion as of Sept. 30, 2012, and an expected FFO at about R$500 million during the next 12 months. Cash uses include the company's short-term debt maturities of R$381 million as of Sept. 30, 2012, capital expenditures of about R$300 million and estimated working capital needs of R$140 million. Rede D'Or expects to distribute annual dividends of about R$5 million over the next few years. These payments will not substantially impact its liquidity. Although the company will post a limited covenant cushion by year-end 2012, we believe that it has the flexibility to respect its covenants. Outlook The stable outlook reflects our expectation that Rede D'Or will significantly improve its credit metrics in the short term as it integrates the hospitals it has recently acquired. We expect the company's debt to EBITDA to be around 5.5x-6.0x in 2013 and about 4.5x in 2014. We could lower the rating if over the next few quarters the company's cash generation levels are not in line with our base-case scenario, which could result from difficulties in integrating the recently acquired hospitals or due to additional acquisitions that require further debt. This could result in weaker-than-expected credit metrics, such as a debt to EBITDA of more than 6x by the end of 2013 (or a net debt to EBITDA of more than 4.5x). We are unlikely to raise the rating in the short term unless we believe that the company is capable of turning around the acquired assets' operations faster than we project and, therefore, reduce its debt sooner than expected. FFO to total debt of more than 20% and total debt to EBITDA dropping to 4x are potential indications of such an improvement in leverage metrics. However, we do not expect this scenario to occur until 2014. Related Criteria And Research -- Methodology: Management And Governance Credit Factors For Corporate Entities And Insurers, Nov. 13, 2012 -- Methodology And Assumptions: Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011 -- Business Risk/Financial Risk Matrix Expanded, May 27, 2009 -- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008 Ratings List New Rating Rede DOr Sao Luiz S.A. Senior Unsecured BB- Senior Unsecured brA- New Rating; Outlook Action Rede DOr Sao Luiz S.A. Corporate Credit Rating Global Scale Rating BB-/Stable/-- Ratings Affirmed Rede DOr Sao Luiz S.A. Corporate Credit Rating Brazilian Scale Rating brA-/Stable/-- (Caryn Trokie, New York Ratings Unit)
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