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TEXT - S&P rates Rede D'Or Sao Luiz S.A.
January 14, 2013 / 8:41 PM / 5 years ago

TEXT - S&P rates Rede D'Or Sao Luiz S.A.

(The following statement was released by the rating agency)
    
Overview

     -- Rede D'Or Sao Luiz has gained a leading position in Brazil's hospital 
management industry thanks to recent acquisitions, which have also resulted in 
sizable debt.
     -- We are assigning our 'BB-' corporate credit rating to Rede D'Or. 
     -- We are also assigning our 'BB-' global scale and 'brA-' national scale 
rating to the company's debentures of up to R$270 million.
     -- The stable outlook reflects our expectation that the company will 
rapidly improve its credit metrics while it consolidates operations.

Rating Action

On Jan. 14, 2013, Standard & Poor's Ratings Services assigned its 'BB-' 
corporate credit rating to Rede D'Or Sao Luiz S.A. (Rede D'Or). At the same 
time, we have assigned our 'BB-' global scale and 'brA-' national scale rating 
to the company's debentures of up to R$270 million. The outlook is stable.

Rationale

The ratings on Rede D'Or reflect our view of the company's "fair" business 
risk profile, "aggressive" financial risk profile, and "adequate" liquidity. 
Our assessment of Rede D'Or's "fair" business risk profile recognizes the 
company's leading position in Brazil's private hospital market, as well as its 
efficient operations and positive track record in turning over acquired 
assets. However, its limited geographic diversification and revenue 
concentration in its five largest hospitals offset these strengths. In our 
analysis, we also consider the favorable fundamentals in Brazil's health care 
industry, including the ongoing growth in private health insurance coverage, 
which currently serves only 25% of country's population. Rede D'Or has no 
exposure to government reimbursements and a significant portion of its 
revenues comes from five large healthcare plans which assure revenue and cash 
flow predictability.

In our view, the company's operations are efficient. Rede D'Or's long 
established hospitals have maintained occupancy rates of near 80%. 
Furthermore, thanks to several acquisitions in the past few years, the company 
has achieved efficiency gains as a result of both higher economies of scale 
for the acquisition of hospital materials and medication and the process 
improvements in the acquired hospitals. We expect Rede D'Or to expand its 
operations organically in the next few years as it integrates its recently 
acquired hospitals and benefits from the resulting stronger cash generation. 
The company has improved its profitability as it completes the integration of 
its acquisitions. We expect its profitability to further increase due to Rede 
D'Or's improved mix of services, as its hospitals perform more complex 
procedures that command higher average fees. 

We assess Rede D'Or's financial risk profile as "aggressive." The company's 
current credit metrics reflect a "highly leveraged" financial risk profile, 
according to our criteria, as Rede D'Or increased its debt for recent 
acquisitions. However, we believe the company has the ability to rapidly 
consolidate these acquisitions and consequently strengthen its cash generation 
and credit metrics by the end of 2013, which would be in line with an 
"aggressive" financial risk profile assessment. Rede D'Or's smooth debt 
profile, with no significant debt maturities until 2015, is also a mitigating 
factor. 

On a pro forma basis for the company's acquisitions in 2012, our base-case 
scenario considers a revenue growth of about 40%, primarily due to its 
acquired hospitals, which added about 700 new beds during 2012. From 2013 
onwards, we expect an average annual revenue growth of 15%-20%, based mainly 
on internal expansion, with the company's portfolio increasing to about 5,000 
hospital beds by 2015. Under our assumptions, which incorporate increasing 
occupancy rates, diversification of services, and gains of scale, Rede D'Or 
may post EBITDA margins of about 20% over the next few years. 

The company has issued new debt in anticipation of the cash disbursement for 
acquisitions and as a result, has retained higher cash levels at certain 
times. If the acquisitions are not completed according to the original 
schedule, resulting in lower-than-expected revenues and cash generation, we do 
not expect this to harm the rating as long as company maintains its current 
net leverage metrics. We expect Rede D'Or's total adjusted debt to EBITDA to 
be 5.5x-6.0x and funds from operations (FFO) to debt of about 14% by December 
2013, significantly stronger than 9.6x and 11.8%, respectively, in 2011. We 
also expect Rede D'Or to post a net debt to EBITDA of about 4x and FFO to net 
debt of 20% by December 2013. 

Liquidity

We believe that Rede D'Or has adequate sources of liquidity to cover its needs 
in the near term. Our assessment of the company's liquidity profile 
incorporates the following assumptions:

     -- Sources of liquidity will exceed uses by more than 1.5x during the 
next 12 months;
     -- Net sources of liquidity should remain positive, even if EBITDA 
declines by 15%;
     -- A limited cushion to comply with financial covenants by year end 2012, 
but the cushion will improve in 2013 and beyond; and
     -- Sound relationships with banks in Brazil.

The company's liquidity sources include its cash position of R$1.1 billion as 
of Sept. 30, 2012, and an expected FFO at about R$500 million during the next 
12 months. Cash uses include the company's short-term debt maturities of R$381 
million as of Sept. 30, 2012, capital expenditures of about R$300 million and 
estimated working capital needs of R$140 million. 

Rede D'Or expects to distribute annual dividends of about R$5 million over the 
next few years. These payments will not substantially impact its liquidity. 
Although the company will post a limited covenant cushion by year-end 2012, we 
believe that it has the flexibility to respect its covenants.  

Outlook

The stable outlook reflects our expectation that Rede D'Or will significantly 
improve its credit metrics in the short term as it integrates the hospitals it 
has recently acquired. We expect the company's debt to EBITDA to be around 
5.5x-6.0x in 2013 and about 4.5x in 2014. We could lower the rating if over 
the next few quarters the company's cash generation levels are not in line 
with our base-case scenario, which could result from difficulties in 
integrating the recently acquired hospitals or due to additional acquisitions 
that require further debt. This could result in weaker-than-expected credit 
metrics, such as a debt to EBITDA of more than 6x by the end of 2013 (or a net 
debt to EBITDA of more than 4.5x). We are unlikely to raise the rating in the 
short term unless we believe that the company is capable of turning around the 
acquired assets' operations faster than we project and, therefore, reduce its 
debt sooner than expected. FFO to total debt of more than 20% and total debt 
to EBITDA dropping to 4x are potential indications of such an improvement in 
leverage metrics. However, we do not expect this scenario to occur until 2014.

Related Criteria And Research

     -- Methodology: Management And Governance Credit Factors For Corporate 
Entities And Insurers, Nov. 13, 2012
     -- Methodology And Assumptions: Liquidity Descriptors For Global 
Corporate Issuers, Sept. 28, 2011
     -- Business Risk/Financial Risk Matrix Expanded, May 27, 2009 
     -- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008


Ratings List
New Rating

Rede DOr Sao Luiz S.A.
 Senior Unsecured                       BB-                
 Senior Unsecured                       brA-               

New Rating; Outlook Action

Rede DOr Sao Luiz S.A.
 Corporate Credit Rating                
 Global Scale Rating                BB-/Stable/--      

Ratings Affirmed

Rede DOr Sao Luiz S.A.
 Corporate Credit Rating
 Brazilian Scale Rating                brA-/Stable/--     

 (Caryn Trokie, New York Ratings Unit)

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