(Repeat for additional subscribers)
April 24 (The following statement was released by the rating agency)
Fitch Ratings has assigned Cerba European Lab SAS's (Cerba; B+/Stable) planned tap issue of EUR80m of senior secured notes expected ratings of 'BB-(EXP)' and 'RR3(EXP)'.
The proceeds will be used to fund the bolt-on acquisition of JS Bio SELAS and related entities (JS Bio), a network of 36 collection centres and six technical platforms in the south east of France, refinance JS Bio's existing debt as well as pay related fees. The impact of this acquisition on Cerba's credit profile is neutral (see 'Fitch: No Impact on Cerba's Rating from Acquisition in South Eastern France' dated 7 April 2014). The assignment of the final ratings is contingent on the completion of the JS Bio acquisition and the receipt of final documents materially conforming to information already reviewed.
Pending completion of the acquisition, the proceeds of the tap issue notes will be deposited in an escrow account. While in escrow, the notes will not be guaranteed and will be secured by a first-ranking charge over the escrow account. If the acquisition is not completed prior to 31 October 2014, the notes will be subject to a special mandatory redemption at par plus any accrued and unpaid interest. Upon completion of the acquisition, the tap issue notes will share the same key terms and conditions as the existing EUR365m 7% senior secured notes due 2020. They will be senior secured obligations of Cerba European Lab SAS and share the same ranking, coupon and maturity. They will also benefit from the same incurrence-based covenants, security package and guarantees.
Cerba's EUR50m revolving credit facility - assumed to be fully drawn in a default scenario - will continue to rank ahead of the senior secured notes on enforcement proceeds. However, despite the higher amount of senior secured debt, the contribution of JS Bio to the total enterprise value in a distressed scenario supports our expectation of an above-average recovery rate for the tap noteholders within the 51%-70% range, corresponding to a Recovery Rating of 'RR3'. This is in line with our recovery expectations for existing senior secured noteholders.
KEY RATING DRIVERS
Weak Credit Metrics
The group's credit metrics are weak and commensurate with a 'B+' IDR within the healthcare sector. We expect Cerba's free cash flow generation to remain constrained to low-mid single digits (as a percentage of revenue) as a result of high cash interest paid on the 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 funds from operations (FFO) adjusted gross leverage to remain below 6.5x by 2015-2016 (adjusted for 12 month-contribution of acquisitions including that of JS Bio). In an environment of persistent pressure on reimbursement tariffs from public entities, we believe that Cerba is reliant on successfully integrating these primarily debt-funded acquisitions and extracting synergies to increase EBITDA and FFO.
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 FY13 reported revenue, excluding intercompany sales). Cerba is also developing a network of routine labs (32% of revenue) 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, which Fitch expects to continue, underpinned by growing volumes and fairly stable profitability margins.
Business and Geographical Diversification
The group's 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 takes a positive view of the agreement signed in October 2013 between the French clinical pathology laboratories unions and the authorities 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 while 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 small bolt-on acquisitions over the next two years. A larger acquisition such as that of JS Bio would be considered as event risk.
Positive: Future developments that could lead to positive rating actions include
- Ability to increase scale via acquisitions while 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
-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 EUR64m of cash on balance sheet as of 31 December 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.