(Repeat for additional subscribers)
May 30 (The following statement was released by the rating agency)
Fitch Ratings has affirmed UK-based health insurance and health care company Bupa Finance plc's (BF) Long-term Issuer Default Rating (IDR) and senior unsecured rating at 'A-' and its Short-term IDR at 'F2'. The fixed-term subordinated notes have been affirmed at 'BBB' and the perpetual notes at 'BBB+'. The Outlook is Stable.
The ratings' affirmation reflects Bupa Group's ability to operate successfully in the highly competitive market for private medical insurance and closely related healthcare services and to develop its business model outside established markets. Following a period of significant acquisitive growth, which has increased its size, scale, geographic reach, and diversification of cash flows resulting in an improved business risk profile, BF has, however, exhausted its financial headroom under the current ratings.
Although Fitch expects weak credit metrics in 2014 as a result of the recent acquisitions the Stable Outlook reflects the agency's expectation that the group will now focus on the integration of acquired assets and on delivering the associated synergies and growth opportunities, which the agency believes carry limited execution risks. As a result, Fitch expects BF's debt protection ratios to restore headroom under the 'A-' rating within the next 12 to 18 months.
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, 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 has 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, up 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 need within the existing ratings, given its strong commitment to its 'A-' rating. Adequate Liquidity
To fund the recent acquisitions, BF has entered into a GBP300m short-term bridge facility maturing in December 2014 in addition to increased drawing under its GBP800m revolving credit facility. Fitch assumes that short-term debt will be refinanced during 2014, lengthening the group's debt maturity profile. 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.
Negative: Future developments that, individually and/or collectively, could 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 and/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 as result of recent acquisitions.