Fitch Rates Bupa Finance PLC's GBP350m 7-year bond 'A-'

Fri Jul 4, 2014 11:30am EDT

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(The following statement was released by the rating agency) LONDON, July 04 (Fitch) Fitch Ratings has assigned Bupa Finance plc's (BF) GBP350m bonds a final senior unsecured rating of 'A-', in line with the Long-term Issuer Default Rating (IDR). The terms of the final documentation of the bond are in line with the information already reviewed when assigning the expected ratings to this instrument on 2 June 2014. The GBP350m senior bond was issued by Bupa Finance plc and is guaranteed by The British United Provident Association Ltd, BF's top parent company. Proceeds from the bond are being used to pay back the outstanding GBP300m acquisition financing facility, which was negotiated in December 2013, as well as reduce drawings under bank loans. KEY RATING DRIVERS FOR THE BOND Evolving Funding Structure Unlike BF's 2016 senior notes and its bank debt, this bond issue is not guaranteed by any of the group's subsidiaries. Hence, Fitch classifies the 2016 senior notes and the bank debt as benefitting from the upstream guarantees and, together with other debt at operating company level, as prior-ranking debt. Despite not being guaranteed by the group subsidiaries the senior bond rating is aligned with the 'A-' IDR as BF's prior-ranking debt/EBITDA is below 1x, well below Fitch's threshold of 2x- 2.5x for structural subordination. Furthermore, Fitch does not expect this ratio to increase above 2x in the near future. Fitch expects that future debt will be raised using the current structure (only guaranteed by parent company and not subsidiaries) and that any further subordination would be temporary until the GBP350m bond matures in 2016. In 2016 Fitch expects the bond and the bank debt security structure will be aligned. KEY RATING DRIVERS Strong Market Positions BF's ratings are supported by its strong market positions in its core private medical insurance (PMI) markets of the UK, Australia and Spain. Furthermore, it benefits from geographical diversification in terms of economies, customers and fiscal incentives for private health insurance. The ratings also benefit from Bupa Group's strong market positions in the fragmented UK and Spanish care home markets, where it is the second-largest market player. In addition, Fitch views the recent acquisitions as moderately beneficial for Bupa Group's business profile. Increasing Diversification of Cash Flows BF is not reliant on one geographical area. In 2013, 42% of its revenue came from the Australia & NZ market units, 28% from the UK, and 15% from Spain & Latin America. The recent acquisitions will lead to a slight improvement in geographic and product diversification for BF. Ownership of Care Homes BF's UK care business has an advantage over some of its major peers as it owns about 80% of its care homes, and also has the financial support of Bupa Group. However, the care homes business on a standalone basis would be rated lower than the insurance business as it is geographically less diversified and care homes generally require significant ongoing investments. Fitch therefore expects an increase in capex on care homes as the company is expected to spend on new builds. Deleveraging in Prospect BF completed a number of acquisitions in 2013 which, in aggregate, represent the highest amount spent on M&A since 2008. This has led to around a net GBP1.3bn cash outflow in the past 18 months. In addition, in February 2014 the company completed the acquisition of 56% of Cruz Blanca in Chile for GBP205.6m. These acquisitions will improve the business risk profile, but the associated increase in debt will increase financial leverage. Adjusted net leverage (adjusted for restricted cash flow, restricted cash, and interest income for return-seeking assets) to EBITDAR rose to 1.9x in 2013, from 0.8x in 2012. Fitch expects a further increase in leverage to 2.3x in 2014, followed by a sustained period of deleveraging towards 1.5x in 2016. EBITDAR fixed charge cover is estimated by Fitch to decline to 4.6x in 2014 (from 5.2x in 2013) before reverting towards 5.5x in 2016. The Stable Outlook assumes that management will carefully manage any additional and/or unforeseen capex needs within the existing ratings, given its strong commitment to its 'A-' rating. Improving Liquidity The GBP350m senior unsecured bond has lengthened the company's debt maturity profile as it refinances the short-dated acquisition bridge loan and improves liquidity headroom under BF's bank facility, enhancing overall liquidity. Analytical Approach In assessing BF's IDR, the consolidated cash flow figures for the group are adjusted for restricted cash flow and restricted cash at Bupa PMI level - as a result of regulatory requirements for these businesses. The amount of cash that has to be held by BF in PMI businesses is dependent on the scale of the insurance business in each individual company. As a general rule, if the profitable insurance businesses grow in a year, the amount of cash that each individual company needs to keep will also increase. Consequently some of the cash flow has to be left in these entities each year and is not available for debt reduction at BF (restricted cash flow). The increase in restricted cash flow is deducted from EBITDA. In FY13 there was an increase in restricted cash flow of GBP7m. Fitch also includes the cash interest received by BF as part of group operating income, as it belongs to the business of an insurance company to invest. RATING SENSITIVITIES Negative: Future developments that could, individually or collectively, lead to negative rating action include: -A change in adjusted net debt/EBITDAR to around 2.0x (or funds from operations (FFO) adjusted net leverage of 2.5x) and EBITDAR net fixed-charge cover of below 5.0x (or FFO adjusted fixed charge cover of 4.5x) on a sustained basis, for example, as a result of inability to deliver on projected growth and/or in case of large capex -Higher-than-expected investments affecting free cash flow -Delay in, or negative cash flow impact associated with, integrating recent acquisitions Positive: Future developments that, individually or collectively, could lead to positive rating actions include: -Improved business risk profile and scale leading to sustained enhancement in free cash flow generation -Adjusted net debt/EBITDAR below 1.0x (or FFO adjusted net leverage of 1.5x) on a sustained basis and EBITDAR fixed charge cover of about 10x (or FFO adjusted fixed charge cover of 9.5x) on a sustained basis. Fitch sees a positive rating action as unlikely as financial flexibility has been exhausted by recent acquisitions. Contact: Principal Analyst Roma Patel Analyst +44 203 5301465 Supervisory Analyst Frank Orthbandt Director +44 203 530 1037 Fitch Ratings Limited 30 North Colonnade London E14 5GN Committee Chair Pablo Mazzini Senior Director +44 203 530 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 28 May 2014, 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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