July 31 -
Summary analysis -- Fresenius SE & Co. KGaA ----------------------- 31-Jul-2012
CREDIT RATING: BB+/Watch Neg/-- Country: Germany
Primary SIC: Hospital and
Credit Rating History:
Local currency Foreign currency
27-Feb-2012 BB+/-- BB+/--
31-Mar-2006 BB/-- BB/--
The ratings on Germany-based health care group Fresenius SE & Co. KGaA (FSE) and its subsidiary Fresenius Medical Care AG & Co. KGaA (FME) reflect Standard & Poor’s Ratings Services’ view of the group’s “significant” financial risk profile owing to relatively high leverage from previous debt-funded acquisitions. However, we view the group’s ability to generate good free cash flow and deleverage as supportive of the ratings.
Among the factors supporting our view of the group’s “satisfactory” business risk profile are FME’s position as the world’s largest provider of products and services for dialysis, FME’s integration in FSE, and FSE’s market-leading position in Europe for clinical nutrition and infusion therapy. Additional supporting factors include: a recurrent revenue stream owing to the chronic nature of kidney failure; attractive growth prospects due to aging populations; and increasing demand for health care in developing countries.
These positive factors are partly mitigated by FME’s predominant focus on a single disease area, although this is tempered by the continued diversification of the remainder of the group through FSE’s subsidiaries.
The alignment of the corporate credit rating on FME with that on FSE is a consequence of our assessment of FME’s relationship with FSE. This includes FSE’s significant influence over FME, as well as the nature of their economic relationship.
S&P base-case operating scenario
Our base-case credit scenario assumes that the group will achieve mid-single-digit organic revenue growth in 2012, while the newly acquired businesses in 2011 should lift revenues by at least high-single digits over the medium term.
FSE is diversifying away from reliance on FME and its dialysis business. We understand that the group intends to acquire Rhon-Klinikum AG (not rated), a German private hospital operator, and Fenwal Inc. (B+/Stable/--), a leading U.S.-based provider of transfusion technology products for blood collection, separation, and processing. Post these acquisitions, FSE will derive 50% of its EBITDA from outside the dialysis industry and we anticipate that it will be able to generate pro forma revenues and EBITDA of about EUR22 billion and EUR4 billion, respectively, in the full years 2012 and 2013.
If FSE is able to assimilate the proposed acquisitions, we would likely reassess the group’s business risk profile as “strong,” an improvement from “satisfactory” currently. This would reflect our view of its increasing size, diversification, and leading positions in several markets.
S&P base-case cash flow and capital-structure scenario
Following the acquisitions of Rhon-Klinikum and Fenwal Holdings, we anticipate that FSE’s debt to EBITDA will likely increase to 3.5x-4.0x, with funds from operations (FFO) to debt remaining in the 15%-20% range over the next 12-18 months. The group will increase its scale and deleveraging capacity but, as per our base-case forecast, its debt-protection metrics will remain in line with those we consider commensurate with an “aggressive” financial risk profile. We anticipate that FSE will generate free cash flow (after capital expenditures, before acquisitions and dividends) in excess of EUR1 billion in 2012, following the acquisitions.
We would likely reassess the group’s post-acquisition financial risk profile as “aggressive.” This primarily takes into account the recent increase in the frequency of acquisitions and the resulting higher leverage. However, we recognize that FSE has a track record of assimilating sizable acquisitions and reducing debt relatively quickly thanks to its strong cash-generating capacity.
We assess the group’s liquidity profile as “adequate” under our criteria. We forecast that liquidity sources (including cash, FFO, and the available credit facilities) should exceed uses over the next 12 months by more than 1.2x. Even if EBITDA were to decline by 15%-20%, we believe that net sources would remain positive. (See “Methodology And Assumptions: Liquidity Descriptors For Global Corporate Issuers,” published Sept. 28, 2011, on RatingsDirect on the Global Credit Portal.)
Our assessment is based on the following sources of liquidity over the next 12 months:
-- On Dec. 31, 2011, the group had cash of EUR635 million available, together with approximately EUR800 million under committed and uncommitted bank facilities; $960 million under FME’s $3.9 billion credit agreement expiring in March 2013; and $550 million under FSE’s $2.3 billion credit agreement.
-- We anticipate that FSE should be able to generate at least EUR1.6 billion of cash from operations per year over the next three years, comfortably covering capital expenditures and dividends of about EUR1 billion and EUR400 million to EUR500 million per year, respectively.
We project the following uses of liquidity over the next 12 months:
-- Debt of about EUR1 billion (as of July 30, 2012) due by the end of the fourth quarter of 2012, mainly comprising repayments under the group’s credit agreements and FSE’s euro-denominated notes.
-- Long-term debt maturities at FSE (excluding FME). These are concentrated in 2013 and 2014, when about EUR1 billion is due under the senior credit agreement, in addition to about EUR800 million of euro-denominated and senior notes, and EUR204 million under European Investment Bank (AAA/Negative/A-1+) facilities.
-- Long-term debt maturities at FME. These are concentrated in 2012 and 2013, when about $2.4 billion (as of July 30, 2012) under credit agreement facilities is due for repayment.
-- Maintenance covenants under FSE’s senior secured loans agreement, mainly comprising leverage and interest coverage ratios. We anticipate that FSE should be able to maintain adequate (15%-30%) headroom under these covenants.
The issue ratings on all debt instruments issued by FME and FSE are on CreditWatch with negative implications.
We intend to revise the assumptions of our recovery analysis and assess the effect of the proposed acquisitions on the recovery prospects for the various debt instruments when more details emerge about the transaction financing arrangements. We note that FSE’s senior unsecured notes are the most sensitive debt tranche in the financial structure.
For more details, see our full recovery reports “Fresenius SE & Co. KGaA Recovery Rating Profile,” and “Fresenius Medical Care AG & Co. KGaA Recovery Rating Profile,” both published April 11, 2012.
The continuing CreditWatch placement on the corporate credit rating reflects the possibility of a one-notch downgrade should FSE’s proposed acquisitions of Rhon-Klinikum and Fenwal Holdings push the group’s Standard & Poor‘s-adjusted debt to EBITDA to more than 4x. This would depend on the final price paid for Rhon-Klinikum and the debt-to-equity composition of the financing.
We aim to resolve the CreditWatch within next three months, subject to further progress on the proposed transactions. As part of the resolution, we will review the effect of any changes to the debt financing structure on the recovery prospects for the group’s various rated debt instruments. Specifically, in the event of any significant increase in the level of secured financing beyond that currently proposed, the issue and recovery ratings on the unsecured notes could be vulnerable to being lowered as a result of increasing subordination and declining recovery prospects.
Related Criteria And Research
All articles listed below are available on RatingsDirect on the Global Credit Portal, unless otherwise stated.
-- Table Of Contents: Standard & Poor’s Corporate Ratings Criteria, July 10, 2012
-- Criteria Guidelines For Recovery Ratings On Global Industrials Issuers’ Speculative-Grade Debt, Aug. 10, 2009
-- Understanding Standard & Poor’s Rating Definitions, June 3, 2009
-- Criteria Methodology: Business Risk/Financial Risk Matrix Expanded, May 27, 2009
-- Key Credit Factors: Business And Financial Risks In The U.S. For-Profit Health Care Facilities Industry, Jan. 21, 2009
-- Fresenius SE & Co. KGaA Recovery Rating Profile, April 11, 2012