RPT-Fitch Affirms Labco SA at 'B+'; Outlook Stable

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June 27 (Reuters) - (The following statement was released by the rating agency)

Fitch Ratings has affirmed France-based clinical laboratory services company Labco SA's (Labco) Long-term Issuer Default Rating (IDR) at 'B+'. The Outlook is Stable. Fitch has also affirmed the senior secured notes at 'BB-' with a Recovery Rating of 'RR3' and the super senior revolving credit facility rating at 'BB' with a Recovery Rating of 'RR2'.

KEY RATING DRIVERS

Market-Leading Positions: Labco is the largest medical diagnostics company in France and Iberia. It is also the second-largest diagnostic company, with a pan-European presence, in Western Europe. Labco continues to benefit from this geographical diversity through reduced reliance on single healthcare systems. Stable End-Markets: Healthcare markets are underpinned by favourable demographics and socioeconomic factors. While these drivers vary from country to country the overall trend is positive.

Modest Q113 Performance: Like-for-like Q113 revenue was down by 0.8% compared to the prior year (excluding the impact of the UK joint venture with Sodexo), and recurring EBITDA increased by 0.3%. Organic performance was supported by growth in Belgium and France and the effect of acquisitions completed in 2012. Government cost-containment measures in most of Labco's markets are expected to continue to put pressure on organic growth

Low Organic Growth expected to Remain: Despite favourable demographics, Fitch expects price reductions by the ultimate payer of the tests, such as governments and insurance companies, to hold back growth. Price reductions are expected at average yearly rates of between 1% and 3% due to cost containment measures, particularly in countries where the regulator is the payer. In our view future growth will mainly be achieved through acquisitions, rather than organically. Slow Deleveraging Expected: Despite a slowdown in Labco's acquisition pace in 2012 and 2013, credit metrics are expected to improve slightly, helped by recent acquisitions leading to EBITDA margin improvements over time. Expected end-2013 (pro forma for acquisitions) funds from operations (FFO) net adjusted leverage (x) and FFO interest cover (x) are likely to improve to 6.1x and 2.0x, respectively, from 6.2x and 1.8x in 2012 based on Fitch's projections.

New Law on Medical Biology: The new law adopted by the French Senate in May 2013 requires Labco to rely on new ownership structures for future acquisitions in France. This may lead to a more complicated ownership structure and its implementation will initially be more time-consuming for Labco. The new law also limits Labco's ability to sell or transfer currently owned and future assets and shares of clinical laboratories.

Above Average Recovery Prospects:

Fitch continues to apply a distressed EV/EBITDA multiple of 6x when assigning bespoke recoveries to Labco. This is a slight discount to the average EBITDA multiple at which Labco typically acquires laboratories in need of restructuring. Recoveries on the senior secured notes remain at the low end of Fitch's 'RR3' range, of 51% to 70%. This provides limited headroom in the recovery rating for additional senior secured debt. However the likely continued draw down of the revolving credit facility for acquisitions should increase Labco's enterprise value in the long-term and therefore supports the 'RR3' rating.

RATING SENSITIVITIES

Negative: Future developments that could lead to negative rating action include:

-FFO net adjusted leverage greater than 6.25x and FFO interest charge cover of less than 1.5x on a sustained basis (both on a pro forma basis annualising the EBITDA of any acquisitions).

-Since Labco's ability to source, execute and extract additional cost savings from acquiring laboratories at attractive EBITDA multiples is a key factor underpinning the current rating, a larger acquisition not complying with these parameters could also lead to a negative rating action.

Positive: Future developments that could lead to positive rating actions include:

-Continued industry leading profitability with at least mid-single digit free cash flow as a percentage of revenue.

-FFO net adjusted leverage below 4.5x and FFO fixed charge cover above 2.5x on a sustained basis