August 30, 2017 / 1:15 PM / in 3 months

Fitch Affirms and Withdraws Cerba's IDR of 'B'

(The following statement was released by the rating agency) LONDON, August 30 (Fitch) Fitch Ratings has affirmed and withdrawn the Long-Term Issuer Default Rating (IDR) for Cerberus Nightingale 1 S.A (Cerba) at 'B'. The Outlook is Stable. Concurrently, Fitch has also withdrawn the instrument rating of 'B+'/'RR3' assigned to Cerberus HealthCare SAS. Fitch has withdrawn Cerba's IDR for commercial reasons. Fitch reserves the right at its sole discretion to withdraw or maintain any rating at any time for any reason it deems sufficient. Cerba's rating is underpinned by strong market positions in the consolidating routine and specialist testing market in Europe. Cerba has been able to improve profitability by extracting synergies and implementing cost synergies having expanded by way of bolt-on acquisitions. The rating is constrained by the group's high leverage following the change of ownership. However, it is supported by the defensive business model, satisfactory liquidity and free cash-flow generation, which we believe will facilitate further growth in the business and which lead to the Stable Outlook. KEY RATING DRIVERS Financial Leverage Constrains Rating: Fitch estimates that following the acquisition by Partners Group/PSP, Cerba's FFO adjusted leverage for the financial year ending 31 December 2017 (FY17) will peak at just over 8.0x, which is weak for the 'B' rating level. FFO fixed charge cover however has been improving post refinancing, and Fitch estimates it will recover to more than 3.0x over the next two years (previously around 2.0x) resulting in greater financial flexibility post refinancing thanks to the lower cost of debt and improved liquidity. Deleveraging Expected, Positive Free Cash Flows: Fitch expects Cerba to generate positive free cash flows (FCF) over its four-year rating horizon, with FCF margins gradually improving from 5.5% in FY17 to close to 9.0% in 2020. In order to maintain its de-leveraging momentum, Cerba will need however a disciplined approach towards acquisitions and their integration. Our rating recognises the satisfactory cash conversion of the business, which we believe offers deleveraging capacity. Industry Consolidation; Reimbursement Pressures: Fitch views the "buy-and-build" strategy currently implemented across the routine testing segment as beneficial to market participants as it has led to the consolidation of a previously very fragmented market across Europe. We also believe that this strategy still has some way to go before concentration issues may arise. However, we also observe continued pressure on reimbursement rates, which we believe will be an ongoing feature of this health-care subsector. In our view, top-line growth will be supported by increasing volumes in a deflationary environment, with profitability enhancement coming from scale benefits and synergies. DERIVATION SUMMARY The fragmented European market for routine and specialist laboratory testing services is currently subject to an accelerating pace of consolidation, driven in part by strong private-equity involvement in the sector. The lab testing markets benefit from the same secular trends that are common to health-care markets, such as a growing and ageing population, and an emphasis on early diagnostics and increased frequency of testing in a shift favouring prevention over treatment. The implementation of companies' growth strategies remains subject to individual health-care legislation, with investors expressing concern about the tightly regulated French environment, where Cerba continues to build its market share and where there is further pricing pressure as many of these services are expected to be commoditised in the future and may not even require full doctor involvement. Here, we see the - ultimately failed - example of Theranos labs in the US as an example how the sector is subject to challenges associated with disruptive technologies. KEY ASSUMPTIONS Fitch's key assumptions within our rating case for the issuer include: - revenue Growth of 6.5%-7.0% pa between 2018-20, of which approximately 3.0% is estimated organic growth; - stable EBITDA margins over the four-year Fitch rating horizon of around 23%; - capex estimated at around 5% of sales, annual bolt on acquisitions between EUR50-60 million pa; - no dividends. RATING SENSITIVITIES Rating Sensitivities are no longer relevant given today's rating withdrawal. LIQUIDITY We view Cerba's liquidity profile as satisfactory and improved after the 2017 refinancing, supported by projected free cash-flow generation, as well as a EUR175 million RCF, supporting general corporate purposes as well as investments in the business. There are no material debt maturities over Fitch's four-year rating horizon. Contact: Principal Analyst Peter Wormald Analyst +44 203 530 1357 Supervisory Analyst Frank Orthbandt Director +44 20 3530 1037 Fitch Ratings Limited 30 North Colonnade London E14 5GN Committee Chairperson Giulio Lombardi Senior Director +39 02 8790 87214 Summary of Financial Statement Adjustments - Lease obligations have been capitalised using a multiple of 8x. Media Relations: Adrian Simpson, London, Tel: +44 203 530 1010, Email: adrian.simpson@fitchratings.com. Additional information is available on www.fitchratings.com. 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