Fitch Places Fresenius on Rating Watch Evolving

Fri Sep 13, 2013 11:20am EDT

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(The following statement was released by the rating agency) LONDON, September 13 (Fitch) Fitch Ratings has placed Fresenius SE & Co. KGaA's (FSE) and Fresenius Medical Care AG & Co. KGaA's (FMC; together Fresenius) Long-term Issuer Default Ratings (IDR), senior secured and senior unsecured ratings on Rating Watch Evolving (RWE). FSE and FMC's Short-term IDRs and FSE's commercial paper programme rating have been placed on Rating Watch Positive (RWP). The rating actions follow the announcement of the acquisition by Fresenius Helios of 43 private hospitals from Germany-based Rhoen-Klinikum AG (Rhoen). The transaction price is expected to be around EUR3.1bn, which Fresenius intends to finance entirely with debt. While this transaction would result in weaker credit metrics than previously anticipated, its completion at the announced terms would result in a Stable Outlook on the current ratings at worst given the associated strengthening in the business risk profile. While the probability of an upgrade is somewhat lower than previously anticipated, Fitch does not discount Fresenius's trajectory towards becoming investment grade. If successful, the transaction would enable Fresenius to acquire about EUR2bn of additional revenue and about EUR250m of EBITDA before expected synergies. From a business profile standpoint, the proposed transaction would make Fresenius Helios the leading private hospital operator in Europe whilst improving the group's geographical diversification and further alleviating its reliance on one disease area (dialysis). Given the 100% debt funding, we expect the net debt to EBITDA ratio to increase on a pro forma basis and remain beyond the group's target range of 2.5x-3.0x, possibly until at least FY14. However, the probability of a downgrade is negligible. Fresenius expects to complete a majority of the hospital purchases by the end of FY13, whilst the remainder should be completed during the first half of FY14, subject to regulatory approvals and certain approvals of former municipal owners or current minority shareholders. KEY RATING DRIVERS Improved Business Profile Apart from its number one position in the global dialysis industry, where it benefits from vertical integration, Fresenius' business profile has improved over the past few years through organic growth and acquisitions in non-dialysis business areas. In our view, the proposed transaction with Rhoen strengthens the group's earnings profile and the long-term stability of cash flow generation. Reduced M&A Appetite Post Rhoen Fresenius has a good track record of meeting guidance and financial targets. Although Fresenius will breach its net debt to EBITDA target ratio between 2.5x and 3.0x as a result of the proposed debt-funded acquisition of some of Rhoen's hospitals, we forecast the group's net debt to EBITDA to fall back within the target range by FY15. Besides Rhoen, we expect Fresenius' acquisition policy to remain focused on smaller - mostly cash flow funded - bolt-on acquisitions, thus cementing its financial risk profile commensurate with low investment grade ratings. Market Leadership Positions Expected To Continue Fresenius benefits from the leading market shares of FMC in the dialysis business across most regions the group operates in as well as from Kabi, the European leader in infusion and clinical nutrition therapy and the US number two in generic intravenous (IV) drugs, a non-cyclical business with solid growth prospects. Assuming the proposed acquisition of Rhoen's hospitals is successful, Helios would strengthen its position and size in the German and European private hospitals markets. Relatively Solid And Predictable Earnings/Cash Flow Generation Fresenius has predictable income streams, driven by the steadily growing demand for FMC's dialysis services and recurrence of treatment due to the life-threatening aspects of the disease. FSE's businesses Kabi and Helios also operate in non-cyclical segments and both benefit from stable growth prospects. Despite the proposed transaction and its associated costs, we expect Fresenius to maintain a solid cash flow generation profile and free cash flow margin in the medium term. Vertical Integration Compensates Potential Reimbursement Cuts As a majority of FMC's dialysis services sales are generated by Medicare/Medicaid patients, the group is exposed to increasing pricing pressure over the medium term. Although FMC's performance in the US has been softer over the past few months and other elements of the US healthcare reform are likely to have a detrimental impact on FMC, we believe that the group's vertical integration provides cost advantages and bargaining power translating into a strong competitive advantage relative to peers. RATING SENSITIVITIES If the proposed transaction with Rhoen does not materialise, for example as a result of legal actions pursued by dissenting shareholders of Rhoen, we would most likely affirm the IDR at 'BB+' with a Positive Outlook as well as all other Fresenius ratings. If the transaction goes ahead subject to terms similar to those announced today, we would most likely affirm the IDR at 'BB+'. In this scenario, the future Outlook will depend on the speed of and commitment to achieve sustained deleveraging. A slower deleveraging profile than previously anticipated would lead to a Stable Outlook. Currently, Fitch does not expect an upgrade to materialise at least until FY14. Future developments that could lead to positive rating actions include FFO lease adjusted net leverage of 4.0x or below; FFO net fixed charge cover above 3.2x - both on a continuing basis. An upgrade will be considered if Fresenius demonstrates its commitment to operate at least in the middle of its net leverage guidance range assuming the integration risk of Rhoen's hospitals is perceived as low. Future developments that could lead to negative rating action, including a stabilisation of the rating outlook, include FFO lease adjusted net leverage above 4.5x; FFO fixed charge cover below 2.5x - both on a continuing basis. FULL LIST OF RATING ACTIONS Fitch has placed the following ratings on RWE: FSE: Long-term IDR: 'BB+' Senior unsecured debt: 'BB+' Senior secured debt: 'BBB-' Fresenius Finance B.V.: Guaranteed senior notes: 'BB+' Fresenius US Finance II. Inc.: Guaranteed senior notes: 'BB+' FMC: Long-term IDR: 'BB+' Senior unsecured debt: 'BB+' Senior secured debt: 'BBB-' Fitch has placed the following ratings on RWP: FSE Short-term IDR: 'B' Commercial paper: 'B' FMC Short-term IDR: 'B' Contact: Principal Analyst Paul-Antoine Conti Associate Director +44 20 3530 1292 Supervisory Analyst Britta Holt Director +44 20 3530 1335 Fitch Ratings Limited 30 North Colonnade London E14 5GN Committee Chair Raymond Hill Senior Director +44 20 3530 1079 Media Relations: Hannah Huntly, London, Tel: +44 20 3530 1153, Email: hannah.huntly@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, 'Corporate Rating Methodology', dated 5 August 2013, available at www.fitchratings.com. 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