Fitch Affirms Fresenius at 'BB+'; Outlook Positive

Thu Mar 20, 2014 11:34am EDT

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(The following statement was released by the rating agency) LONDON, March 20 (Fitch) Fitch Ratings has affirmed Fresenius SE & Co. KGaA's (FSE) and subsidiary Fresenius Medical Care AG & Co. KGaA's (FMC; together Fresenius) Long-term Issuer Default Ratings (IDR) at 'BB+'. The ratings have been removed from Rating Watch Evolving (RWE) on which they were placed since 13 September 2013. The Outlook on the IDRs is Positive. A full list of rating actions is provided below. The affirmation of the ratings reflects the completion of the acquisition by Fresenius Helios of 39 hospitals and 11 outpatient facilities from Rhoen-Klinikum AG (Rhoen) on terms that are materially in line with those announced in September 2013. The affirmation is also supported by Fresenius' resilient performance in FY13 overall, despite some weakness in profitability resulting from a challenging reimbursement environment for FMC in the US and the integration of Fenwal Holdings with Fresenius Kabi. The Positive Outlook reflects our view that Fresenius' business profile will improve as Fresenius Helios integrates Rhoen's hospitals, bringing about EUR2bn additional revenue and geographical diversification to the group's earnings profile. Fresenius' financial metrics (pro forma for Rhoen) remain weak relative to most other 'BBB-' healthcare peers in developed markets. However, the Positive Outlook reflects our expectation that Fresenius will manage to bring its leverage metrics back to levels that are more comfortable with a higher rating by FY15. This is supported by sustained operating performance and a disciplined acquisition policy towards smaller, mainly cash-flow funded, bolt-on acquisitions. KEY RATING DRIVERS Improving Business Profile Since 2011, Fresenius has diversified its business outside of dialysis via organic growth at Kabi and Helios as well as through large acquisitions such as Damp Group, Fenwal Holdings and Rhoen's hospitals. Such growth has strengthened Fresenius' earnings profile and the long-term stability of its cash flow generation. Post-acquisition of Rhoen's hospitals, we expect the contribution of FMC's dialysis business to Fresenius' revenue will drop below 50% (FY13: 54%). In our view, Fresenius' business profile is stronger than most 'BBB-' rated peers in the healthcare sector. Commitment to Financial Targets Fresenius has a sound track record of meeting guidance and financial targets. Although Fresenius will temporarily breach its net debt to EBITDA target range between 2.5x and 3.0x at a group level as a result of the debt-funded acquisition of Rhoen's hospitals, we project the group's net debt to EBITDA to fall back within the target range as soon as FY15. Post-Rhoen, we assume that Fresenius' acquisition policy will remain centred around smaller - mostly cash-flow funded - bolt-on acquisitions, thus cementing a financial risk profile that is commensurate with low investment grade ratings. Any large debt-funded acquisition would be considered as event risk. Reimbursement Pressure Manageable FMC's dialysis services sales are mainly generated by Medicare/Medicaid patients. As a result, the group is exposed to pricing and profitability pressure in the US. However, we believe that Fresenius' improved diversification, recurring volume of patients and vertical integration into dialysis products and services provide cost advantages and bargaining power while FMC's efficiency programme should make any further reimbursement pressures manageable. Predictable Earnings and Cash Flow Fresenius has predictable income streams driven by steadily growing demand for FMC's dialysis services and recurring treatments due to the life-threatening aspects of the disease. FSE's businesses Kabi and Helios also operate in non-cyclical segments and benefit from stable growth prospects. We view the integration risk of Rhoen's hospitals as low given the similarities with Helios's existing business and management's track record. As a result, we expect Fresenius to maintain a solid cash flow generation profile and low to mid-single digit free cash flow margin over the medium term. Standalone Credit Profiles Convergence We consider that FSE's credit risk profile, on an unconsolidated basis, is similar to that of FMC. While FSE has higher business diversification than FMC, the latter exhibits somewhat stronger profitability and cash flow generation capacity. Following the acquisition of Rhoen, we expect FSE to exhibit similar financial leverage as FMC. However, FSE's IDR, on an unconsolidated basis, would also take into account the financial flexibility provided through its stake in FMC. In our view, any upgrade of the IDRs is predicated on FSE and FMC maintaining similar business and financial risk profiles. However, should FSE's credit profile materially diverge from that of FMC, for example, as a result of debt-funded acquisitions, this could prevent any positive rating action on FSE's IDR. Market-leading Positions Fresenius has leading market shares in most of its divisions. FMC is a global leader in dialysis products and services and Kabi is the European leader in infusion and clinical nutrition therapy and the US number two in generic intravenous drugs. Helios has become a leading private hospitals operator in Europe following the completion of Rhoen's hospitals. RATING SENSITIVITIES Future developments that could lead to positive rating actions include: - FMC's and FSE's (both consolidating and de-consolidating FMC) funds from operations (FFO) lease adjusted net leverage below 4.5x with no major divergence between FMC and FSE (de-consolidating FMC) and FFO net fixed charge cover above 3.2x, while maintaining industry-leading profit margins on a sustained basis. Although we project a slow improvement in metrics through to FY15, an upgrade will be considered once Fresenius has demonstrated its commitment to operate sustainably in the middle of its net leverage guidance range. Future developments that could lead to the Outlook being revised to Stable include: - FMC's and FSE's (both consolidating and de-consolidating FMC) FFO lease adjusted net leverage above 4.5x and FFO fixed charge cover below 2.5x, weaker-than-expected profit margins and FCF margin below 2% on a sustained basis FULL LIST OF RATING ACTIONS FSE: Long-term IDR: affirmed at 'BB+'; off RWE; Positive Outlook Senior unsecured debt: affirmed at 'BB+'; off RWE Senior secured debt: affirmed at 'BBB-'; off RWE Short-term IDR: affirmed at 'B'; off RWP Commercial paper: affirmed at 'B'; off RWP Fresenius Finance B.V.: Guaranteed senior notes: affirmed at 'BB+'; off RWE Fresenius US Finance II. Inc.: Guaranteed senior notes: affirmed at 'BB+'; off RWE FMC: Long-term IDR: affirmed at 'BB+'; off RWE; Positive Outlook Senior unsecured debt: affirmed at 'BB+'; off RWE Senior secured debt: affirmed at 'BBB-'; off RWE Short-term IDR: affirmed at 'B'; off RWP Contact: Principal Analyst Paul-Antoine Conti Director +44 20 3530 1292 Supervisory Analyst Britta Holt Director +44 20 3530 1335 Fitch Ratings Ltd 30 North Colonnade London E14 5GN Committee Chairperson Pablo Mazzini Senior Director +44 20 3530 1021 Media Relations: 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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