June 17, 2013 / 9:57 AM / in 5 years

RPT-Fitch Affirms Fresenius at 'BB+'; Outlook Revised to Positive

June 17 (Reuters) - (The following statement was released by the rating agency)

Fitch Ratings has affirmed Germany-based healthcare group Fresenius SE & Co KGaA’s (FSE) and Fresenius Medical Care AG & Co. KGaA’s (FMC) Long-term Issuer Default Ratings (IDR) at ‘BB+’ and instrument ratings excluding the senior secured debt ratings, which are downgraded to ‘BBB-‘ from ‘BBB’, to align them with Fitch’s existing recovery ratings methodology. The Short-term IDRs and commercial paper program have been affirmed at ‘B’. The Outlook is revised to Positive from Stable. A full list of rating actions is at the end of this release.

The revision of the Outlook to Positive from Stable follows a sustained improvement in FSE’s and FMC’s consolidated (together ‘Fresenius’) business profile. Since Fitch upgraded Fresenius’ IDR to ‘BB+’ from ‘BB’ in August 2011, the group has integrated Liberty Dialysis Group, Damp Group and Fenwal Holdings and pursued a string of smaller bolt-on acquisitions which have improved its business diversification and strengthened its earnings profile. The Positive Outlook also follows a change in Fresenius’ acquisition policy towards smaller - mostly cash flow funded - bolt-on acquisitions. Any potential acquisition of Rhoen-Klinikum AG (Rhoen), is seen by Fitch as an event risk, given the uncertainty about the possibility for Fresenius to be able to acquire Rhoen. An upgrade will be considered once the group has proven that it will continuously operate at the lower end of its net leverage guidance range.

Fresenius’ ratings reflect the group’s diversified healthcare-related businesses with its number one position in the global dialysis industry, where it benefits from vertical integration. They also reflect Fresenius’ solid organic growth prospects and geographical diversification which supports its stable and predictable cash flow generation. In our view, Fresenius’ business profile shares characteristics with some investment grade peers rated ‘BBB-‘, but its financial metrics remain weaker than for most other ‘BBB-‘ healthcare peers.


Improved business profile:

FSE’s business profile continues to improve through organic growth and acquisitions in non-dialysis business areas (Kabi, Helios, Vamed). As a result, Fresenius is less reliant on one disease area, which should help its earnings profile and the long-term stability of cash flow generation.

Commitment to Financial Targets and Reduced M&A Appetite:

Fresenius has track record of meeting guidance and financial targets. One of Fresenius’ financial goals is to maintain a net debt to EBITDA at the lower end of 2.5x-3.0x - although that range might be breached for about 18 months if a debt-funded acquisition opportunity occurs. We believe that large debt funded acquisitions are unlikely to make a significant part of Fresenius’ strategy in the medium term. Any potential acquisition of Rhoen, is seen by Fitch as event risk, given the uncertainty about the possibility for Fresenius to be able to acquire Rhoen.

Market leadership positions expected to continue:

Fresenius benefits from the leading market shares of FMC in the dialysis business across most regions the group operates in as well as from Kabi, the European leader in infusion and clinical nutrition therapy and the US number two in generic intravenous (IV) drugs, a non-cyclical business with solid growth prospects. Helios has critical size in the German private hospitals market.

Relatively solid and predictable earnings / cash flow generation to continue:

Fresenius has a solid cash flow generation, with Fresenius’ free cash flow margin amounting to 6%in FY12, while the adjusted funds from operations (FFO) net leverage was 4.0x (FY11: 4.3x) and FFO fixed charge cover stood at 3.2x (FY11: 3.1x).

FMC has predictable income streams, driven by the steadily growing demand for dialysis services (6% p.a. on average) and recurrence of treatment due to the life-threatening aspects of the disease. FSE’s businesses Kabi and Helios also operate in non-cyclical segments and both benefit from stable growth prospects.

Vertical integration helps to compensate for potential reimbursement cuts:

Vertical integration provides cost advantages and bargaining power to the group. Fresenius could theoretically build a hospital and equip it with machinery (Vamed) and medicines (Kabi), supply it with dialysis machines and run a dialysis centre (FMC). As a majority of FMC’s dialysis services sales are generated by Medicare/Medicaid patients, the group is exposed to increasing pricing pressure over the medium term. Other elements of the US healthcare reform are likely to have a detrimental yet manageable impact on FMC’s performance such as the medical device tax and the effect of public spending cuts. As the world’s number one market player in dialysis FMC is however able to benefit from economies of scale and vertical integration. This provides a competitive advantage compared to peers.


Positive: Future developments that could lead to positive rating actions include: FFO lease adjusted net leverage of 4.0x or below, FFO net fixed charge cover above 3.2x - both on a continuing basis

Negative: Future developments that could lead to negative rating action include: FFO lease adjusted net leverage above 4.5x, FFO fixed charge cover below 2.5x - both on a continuing basis

The rating actions are as follows:


Long-term IDR: affirmed at ‘BB+’, Positive Outlook

Short-term IDR: affirmed at ‘B’

Senior unsecured debt affirmed at ‘BB+’

Senior secured debt downgraded to ‘BBB-‘ from ‘BBB’

Fresenius Finance B.V. :

Guaranteed senior notes affirmed at ‘BB+’

Fresenius US Finance II. Inc. :

Guaranteed senior notes affirmed at ‘BB+’


Long-term IDR: affirmed at ‘BB+’, Positive Outlook

Short-term IDR: affirmed at ‘B’

Senior unsecured debt affirmed at ‘BB+’

Senior secured debt downgraded to ‘BBB-‘ from ‘BBB’

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