Fitch Affirms Cerba at 'B+'; Stable Outlook

Wed Mar 12, 2014 12:19pm EDT

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(The following statement was released by the rating agency) LONDON, March 12 (Fitch) Fitch Ratings has affirmed Cerba European Lab SAS's (Cerba) Long-term Issuer Default Rating (IDR) at 'B+'. The Outlook is Stable. Fitch has also affirmed Cerba's EUR365m senior secured notes at 'BB-'/'RR3'. The affirmation and Stable Outlook reflect Cerba's like-for-like performance in the nine months to September 2013 in line with our expectations, supported by recurring volumes of tests across the routine laboratories network and healthy revenue growth in the Specialised and Central Lab divisions. We expect total organic revenue growth in 2014 and 2015 to reach at least 2% p.a. Cerba's disciplined approach towards the acquisition of routine labs in France since the 2013 refinancing has translated into lower bolt-on M&A activity than we initially anticipated but has enabled the group to increase its EBITDA margin to 22.2% in the first nine months of 2013 (2012: 21.4%). We expect the group EBITDA margin to remain above 20% as well as free cash flow generation and credit metrics to remain consistent with a 'B+' IDR over the medium term. KEY RATING DRIVERS Leading Clinical Laboratories Player Cerba is a leading player in the clinical pathology laboratories market in France. The group benefits from a strong reputation for scientific expertise and innovation at the specialised end of the market (37% of YTD September 2013 revenue, excluding intercompany sales). Cerba is also developing a network of routine labs (32% of sales) around regional platforms that demonstrates its logistical ability to handle a high volume of tests. The IDR is supported by resilient like-for-like performance both historically and in future, underpinned by growing volumes and relatively stable profitability margins. Business and Geographical Diversification The group's additional activities in its Central Lab division globally (12% of sales) as well as its presence in the Belgian and Luxembourg routine markets (23% of sales) provide some geographical diversification and reduce Cerba's exposure to the French healthcare system. Nonetheless, Fitch views the agreement signed in October 2013 between the French clinical pathology laboratories unions and the authorities positively as it mitigates the possibility of drastic reimbursement cuts until 2016, provided volumes do not increase beyond certain thresholds. Track Record of Acquisitive Strategy The ratings also reflect Cerba's ability to take advantage of the fragmentation of the French routine market. In our view, Cerba's acquisitive strategy is sensible as it enables the group to broaden its network of labs around regional platforms whilst realising synergies and increasing scale. We consider the operational execution risk is reduced by management's experience with similar expansion plans. We have assumed Cerba will spend up to EUR50m p.a. on bolt-on acquisitions over the next two years. A larger acquisition would be considered as event risk. Weak Credit Metrics The group's credit metrics are weak but commensurate with a 'B+' IDR given the sector. We expect Cerba's free cash flow generation to remain constrained to low-mid single digit (as a percentage of revenue) as a result of high cash interest paid on the EUR365m senior secured notes. Acquisitions to Drive Mild Deleveraging Fitch expects bolt-on acquisitions to support mild deleveraging prospects over the medium term. Despite uncertainty surrounding the exact timing of acquisitions, we continue to expect FFO adjusted gross leverage to reach about 6.0x by 2014-2015 (pro forma for 12 month-contribution of acquisitions). In an environment of persistent pressure on reimbursement tariffs from payers, we believe that Cerba is reliant on successfully integrating these primarily debt-funded acquisitions and extracting synergies to increase EBITDA and funds from operations (FFO). RATING SENSITIVITIES Positive: Future developments that could lead to positive rating actions include: Cerba's ability to increase its scale via acquisitions whilst improving financial flexibility, resulting in a FFO adjusted leverage below 5.0x and FFO interest coverage above 3.0x on a sustained basis (pro forma for acquisitions). Negative: Future developments that could lead to negative rating action include: Cerba's inability to increase EBITDA and FFO such that the FFO adjusted leverage exceeds 6.5x and FFO interest coverage decreases below 2.0x on a sustained basis (pro forma for acquisitions). LIQUIDITY AND DEBT STRUCTURE Cerba's liquidity is satisfactory with EUR69m of cash on balance sheet as of 30 September 2013, enhanced by an undrawn EUR50m revolving credit facility. Cerba does not face any major seasonal working capital movements throughout the year and does not have any significant debt maturities until 2020 when the senior secured notes fall due. This provides the group with some financial flexibility to execute its acquisition strategy. Contact: Principal Analyst Paul-Antoine Conti Director +44 20 3530 1292 Supervisory Analyst Britta Holt Director +44 20 3530 1335 Fitch Ratings Limited 30 North Colonnade London E14 5GN Committee Chairperson Edward Eyerman Managing Director +44 20 3530 1359 Media Relations: Francoise Alos, Paris, Tel: +33 1 44 29 91 22, Email: francoise.alos@fitchratings.com; 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, 'Corporate Rating Methodology', dated 5 August 2013, are available at www.fitchratings.com. Applicable Criteria and Related Research: Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage here Additional Disclosure Solicitation Status 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 WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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