(The following statement was released by the rating agency)
Fitch Ratings-Frankfurt am Main-May 20:
Fitch Ratings has affirmed Synlab Bondco PLC’s (Synlab) senior secured debt at ‘B+’/‘RR3’ following completion of its refinancing. A full list of rating actions is detailed below.
The ‘B’ IDR of Synlab remains materially constrained by its aggressive leverage profile and financial policies. These weaknesses are balanced by the defensive nature of the company’s routine medical-testing business model. We expect the current COVID-19 crisis to have a moderately negative impact on 2020 financials as reduced routine-testing will only be partly compensated by new business from COVID-19 testing. With the easing of the pandemic restrictions we expect a restoration of routine-testing post 2020 and therefore do not see the pandemic having a lasting impact on Synlab’s credit profile.
The Stable Outlook reflects the outcome of the refinancing with extension of the debt maturities of Synlab’s revolving credit facility (RCF) by two years to July 2023, senior secured term loan B (TLB) to July 2024 and senior secured notes (SSN) to July 2025. It also reflects expected deleveraging to below 8.0x post-2020 on a funds from operations (FFO)-adjusted gross basis (excluding the isolated impact of COVID-19 in 2020).
Fitch has withdrawn the senior secured bond rating for the EUR940 million notes due July 2022 following their full early redemption at refinancing.
Key Rating Drivers
Refinancing Addressed: Synlab has addressed its refinancing risks with the extension of the super senior RCF by two years to July 2023, the TLB to July 2024 and the SSN to July 2025. We view the residual amount of EUR76 million remaining under the TLB due in July 2022 as manageable. Based on the cost of extended and new debt Synlab’s FFO fixed charge cover will remain at around 2.0x through 2023, supporting the Stable Outlook.
Negative Impact from COVID-19 in 2020: The lockdown has led to a significant loss of business volumes related to routine-testing, which could not be fully compensated by new coronavirus tests. We have factored in a revenue decline and a slightly lower EBITDA margin of 16% (Fitch defined, pre-IFRS 16) for 2020. This is, however, somewhat offset by Synlab’s flexibility over non-essential capex and MA, which we assumed will be scaled back to around EUR60 million and EUR50million respectively, while we do not anticipate excessive movements in trading working capital. With the return of routine medical tests to normal volumes post-2020 we see no lasting impact of the pandemic on Synlab’s credit profile.
Permanently High Leverage: Synlab’s permanently elevated FFO-adjusted gross leverage of around 9.0x in 2019 (2018: 8.6x) casts some doubts over the company’s intentions to pursue a less aggressive financial policy. As we estimate the pandemic will temporarily weaken Synlab’s EBITDA and operating profitability in 2020, gross leverage will likely remain at 9.0x in 2020, leading to rather high refinancing risks for its rating over the longer-term.
Strengthening Cash Flows: Synlab’s rating is supported by a record of steadily improving cash flow generation on the back of organic and acquisitive growth and stable operating margins. With a positive momentum in free cash flow (FCF) generation since 2018, we project Synlab will maintain mid-single digit FCF margins, which should help mitigate excessive financial leverage.
Supportive Sector Fundamentals: Lab-testing is regarded as social infrastructure given its defensive non-cyclical characteristics. The sector is driven by steadily rising demand as preventive and stratified medicine becomes more prevalent. Incremental volumes in a structurally growing market compensate for price and reimbursement pressures, as national regulators contain rising healthcare costs. National or pan-European sector constituents such as Synlab are best-placed to capitalise on positive long-term demand fundamentals and extract additional value through scale-driven efficiencies and market-share gains by displacing less efficient and less-focused smaller peers.
Synlab is the largest lab-testing company in Europe, twice the size of its nearest competitor, Sonic Healthcare. Its operations consist of a network of around 500 laboratories across some 40 countries, providing good geographical diversification and limited exposure to a single healthcare system. Its sustainable EBITDA margin at around 18% (Fitch-defined, pre-IFRS 16) slightly lags behind European industry peers’, due to its exposure to the German market with structurally lower profitability. The lab-testing market in Europe has attracted significant private-equity investment, leading to highly leveraged financial profiles. Synlab is highly geared for its rating with FFO-adjusted gross leverage at around 9.0x in 2019 being the key rating constraint.
At the same time, as with other sector peers, such as CAB Societe d’excercice liberal par actions simplifiee (B/Negative) and Cerba, Synlab benefits from a defensive and stable business model given the infrastructure-like nature of lab-testing services. We therefore project that Synlab will be able to generate sustainably positive FCF.
- Organic sales decline in 2020 due to COVID-19, before recovering to low- to mid-single digit organic growth in key markets;
- EBITDA margin (Fitch-defined) at 16% in 2020 due to COVID-19, and at around 18% in 2021-2024;
- Enterprise value (EV)/EBITDA acquisition multiples of 10x;
- Around EUR50 million of bolt-on acquisitions in 2020 on slower MA activity due to COVID-19, up to EUR150 million per annum up to 2024, funded by debt drawdowns and internal cash flows;
- Capex temporarily reduced to 3% of sales in 2020 given coronavirus-related freeze of non-essential capex, and 4% of revenue 2021-2024;
- Satisfactory FCF generation of 4%-4.5% over the next four years; and
- No dividends.
The recovery analysis assumes that Synlab would be reorganised as a going-concern (GC) in bankruptcy rather than liquidated given its asset-light operations.
We have assumed a 10% administrative claim.
Synlab’s GC EBITDA of around EUR300 million is an estimate of post-restructuring EBITDA. At this level of EBITDA Synlab would be FCF-neutral, i.e. generate the minimum level of cash required to remain a GC post-distress. The post-restructuring EBITDA could be achieved as a result of the corrective measures to stabilise organic operations with a sufficiently invested lab network and to allow for timely debt service. Distress could come as a result of adverse regulatory changes, and an aggressive and poorly executed MA strategy leading to an unsustainable capital structure.
The distressed EV/EBITDA multiple of 6x reflects Synlab’s geographic breadth and scale as European lab-testing market leader and with cash-generative operations. This compares with the EV/EBITDA multiple of 9x-11x for smaller targets that are being acquired in the sector.
RCF is assumed to be fully drawn upon default and ranks super senior, on enforcement, ahead of the senior secured and senior debt.
The allocation of value in the liability waterfall results in a Recovery Rating ‘RR1’ for the first-lien RCF and TLB (EUR250 million) indicating a ‘BB’ instrument rating with an output percentage based on the current assumptions of 100%, and a Recovery Rating ‘RR3’ for the senior secured TLB and notes (EUR2.3billion), leading to a ‘B+’ instrument rating with an output percentage of 59%.
The senior notes (EUR375 million) have zero recovery under the waterfall calculation. The Recovery Rating for the senior notes is ‘RR6’ corresponding to an instrument rating of ‘CCC+’.
Factors that could, individually or collectively, lead to positive rating action/upgrade:
- FFO-adjusted gross leverage below 6.5x and FFO fixed-charge coverage above 2.0x; and
- Improved FCF margin to the mid-to-high single-digits or a more conservative financial policy reflected in lower debt-funded MA spending.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
- FFO-adjusted gross leverage above 8.0x beyond 2020 (2019: 8.8x) or FFO fixed-charge coverage at less than 1.5x (2019: 2.0x) for a sustained period (both adjusted for acquisitions);
- Reduction in FCF margin to only slightly positive levels or large debt-funded and margin-dilutive acquisitions; and
- Absence of or negative like-for-like sales growth or inability to extract synergies, integrate acquisitions or other operational challenges leading to EBITDA margin declining to below 17%.
Best/Worst Case Rating Scenario
International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit here
Liquidity and Debt Structure
Satisfactory Liquidity: Organic liquidity is satisfactory, with a cash position of EUR209 million at end-2019. We expect this cash, along with around EUR80 million-EUR100 million in projected annual FCF, will be used for bolt-on MA estimated at EUR150 million per year (except for 2020 when we assume lower MA of EUR50 million due to COVID-19). With this internal cash generation and discretionary MA we project year-end cash balances of at least EUR100 million from 2020 onwards, assuming debt maturities related to the remaining part of TLB and senior notes due 2022 and 2023 respectively are extended.
Synlab has successfully completed its refinancing in volatile market conditions. Following the refinancing, it has a diversified funding structure and an improved debt maturity profile, with main debt maturities now due in 2023-2026. The RCF remains drawn at EUR219 million, but we believe this debt may be repaid by end-2020, given its large cash position and positive underlying FCF generation.
Sources of Information
The principal sources of information used in the analysis are described in the Applicable Criteria.
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
Synlab has an ESG Relevance Score of 4 due to its exposure to social impact as the company operates in a regulated medical market, which is subject to pricing and reimbursement pressures as governments seek to control national healthcare spending and contain rising healthcare costs and may have a negative impact on the credit profile. This is relevant to the rating in conjunction with other factors.4
Except for the matters discussed above, the highest level of ESG credit relevance, if present, is a score of 3 - ESG issues are credit neutral or have only a minimal credit impact on the entity(ies), either due to their nature or the way in which they are being managed by the entity(ies). For more information on Fitch’s ESG Relevance Scores, visit www.fitchratings.com/esg.
Synlab Bondco PLC
——senior secured; Long Term Rating; Affirmed; B+
——senior secured; Long Term Rating; Withdrawn; WD
——senior secured; Long Term Rating; New Rating; B+
——super senior; Long Term Rating; Affirmed; BB
Synlab Unsecured Bondco PLC; Long Term Issuer Default Rating; Affirmed; B; RO:Sta
——senior unsecured; Long Term Rating; Affirmed; CCC+
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Corporate Rating Criteria (pub. 01 May 2020) (including rating assumption sensitivity)
Corporates Notching and Recovery Ratings Criteria (pub. 14 Oct 2019) (including rating assumption sensitivity)
Numbers in parentheses accompanying applicable model(s) contain hyperlinks to criteria providing description of model(s).
Corporate Monitoring & Forecasting Model (COMFORT Model), v7.9.0
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