S&P base-case operating scenario
We believe that Grifols will continue its solid performance thanks to persistent growing demand from healthcare providers worldwide for blood plasma-derivative products. Also, Grifols’ exposure to Spain (BBB+/Negative/A-2) causes only a modest drag on our rating assessment of the company (see the “Country Risk” section below).
We expect that demand for plasma-derivatives products will continue to grow by 5%-7% a year, based on:
-- A rise in the number of patients as a result of increased access to medical care. Thus, plasma-based products will become available to people who previously needed the treatment but had no access to it. This is typically the case in emerging markets. We also expect to see more people in need of treatment, which typically reflects the aging population in mature markets.
-- New products applications and indications. In particular, plasma-based products are being studied for potential use in Alzheimer’s disease.
However, we expect pricing to remain flat after having stabilized in the first half of 2012. This reflects our opinion that the positive impact of growing demand will be offset by pressure resulting from austerity measures and lower reimbursement rates, particularly in Southern Europe.
On this basis, our forecast for Grifols for 2012 and 2013 encompasses the following assumptions:
-- About 10% sales growth in 2012, and around 5% in 2013. This incorporates Grifols’ strong results in the first half of 2012, with pro forma revenues up 15%, but also includes our opinion that market conditions thereafter will weaken as austerity measures toughen in Europe.
-- Our projections of a continued increase in profitability, to about 32.5% adjusted EBITDA margins in 2013. This will primarily stem from optimized capacity utilization following the June 2011 acquisition of Talecris Biotherapeutics Inc.
S&P base-case cash flow and capital-structure scenario
We believe that the group’s solid performance will lead to adjusted leverage reducing to close to 4x by the end of 2012, and to sustainably below 4x thereafter. Our assumption is partly based on the group’s commitment to a disciplined financial policy following the 2011 transformational acquisition of U.S.-based Talecris.
Our base-case scenario also takes into account the following assumptions:
-- About EUR450 million of capital expenditures (capex) over the 2012-2016 period, as Grifols is investing in capacity to be able to address the growth in demand.
-- No dividend payment in 2012 and limited dividend payments thereafter of about 40% of net income.
-- Limited acquisitions.
-- No share buy-back activity.
-- Significant debt repayment of around EUR1 billion over the next three years, including moderate mandatory amortization of EUR292 million and additional voluntary prepayment, signifying Grifols’ capacity and willingness to delever rapidly.
We view the group’s liquidity as “adequate,” under our criteria, as its sources of liquidity comfortably exceed by 1.2x its uses of liquidity over the next 12 months.
Grifols’ sources of liquidity include:
-- Cash balances of EUR315 million at the end of June 2012;
-- Annual funds from operations (FFO) of around EUR500 million; and
-- Undrawn committed revolving credit facility of $175 million and EUR22 million maturing in 2016.
Grifols’ uses of liquidity include:
-- Moderate mandatory annual bank loan maturities of EUR82 million in 2012, EUR90 million in 2013, and EUR120 million in 2014. Other upcoming debt maturities are not material.
-- Sizable capex of about EUR450 million to be spent over the 2012-2016 period.
-- Annual working capital movement of EUR50 million-EUR100 million.
In addition, we continue to project adequate (that is, above 20%) headroom under the bank covenants.
-- The issue rating on Grifols’ senior secured bank debt is ‘BB+', one notch above the corporate credit rating on the company. The recovery rating on this instrument is ‘2’, indicating our expectation of substantial (70%-90%) recovery for the lenders should a payment default occur. The issue rating on Grifols’ unsecured notes is ‘B+', two notches below the corporate credit rating on the company. The recovery rating on this instrument is ‘6’, reflecting our expectation of negligible (0%-10%) recovery for noteholders should a payment default occur.
-- We expect that Grifols would be reorganized and sold as a going concern in the event of a default.
-- Our simulated default scenario contemplates a default in 2016, triggered by a hypothetical deterioration of the group’s operating performance and its incapacity to refinance debt falling due that year.
-- At our simulated point of default, we estimate that Grifols’ stressed enterprise value would be about EUR2.5 billion, resulting in a recovery rating of ‘2’ (70%-90% recovery) for the senior secured lenders and ‘6’ (0%-10%) for the unsecured bondholders. This also reflects the group’s exposure to the Spanish insolvency regime, which we view as relatively unfavorable for creditors.
For more details on our recovery analysis, please see “Spain-Based Grifols Bank Debt ‘BB’ Rating Affirmed, ‘2’ Recovery Rating Unchanged On Proposed Documentation Changes,” published on Feb. 9, 2012.
The stable outlook reflects our opinion that Grifols will continue its strong performance, leading to a reduction in its adjusted debt leverage to close to 4x by the end of 2012 and below 4x on a sustainable basis thereafter. The stable outlook also reflects our opinion that Grifols’ cash balances, revolving credit facility, and internally generated free cash flow will continue to comfortably cover its upcoming moderate debt repayments, as liquidity is drying up in Spain and access to external sources of cash may be restrained.
The stable outlook does not factor in any significant change of the sovereign rating on Spain. Despite our view of Grifols’ limited exposure to Spain, the rating on Grifols would need to be reviewed should there be any material change in the economic and political situation in Spain or in the sovereign rating on Spain, where Grifols is headquartered.
An upgrade could occur if Grifols reduces it debt leverage to close to 3x, through a combination of EBITDA growth and further debt repayment. This could occur if Grifols’ revenues increased by 10% and EBITDA margins improved to above 34% in 2013, compared with our base-case assumptions of 5% and 32.5%, respectively.
Conversely, we could lower the rating if leverage does not improve sustainably to below 4x in 2013. This could happen if the austerity measures in Europe had a higher-than-expected impact or if the synergies from the merger with Talecris were lower than expected. We calculate that flat revenues growth and EBITDA margins below 29% in 2013 would cause leverage to increase above 4x.We could also lower the ratings if Grifols was to unexpectedly deviate from its publicly stated financial policy of reducing net reported leverage to below 2.5x by 2014, which could take the form of material debt-financed acquisition or shareholder return.
Finally, though we consider it unlikely at this stage, given the group’s track record, we could downgrade the rating if performance and cash generation were to deteriorate due to a product recall or contamination, impairing the group’s ability to reduce its leverage.
Related Criteria And Research
All articles listed below are available on RatingsDirect on the Global Credit Portal, unless otherwise stated.
-- Methodology And Assumptions: Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011
-- Criteria Guidelines For Recovery Ratings On Global Industrials Issuers’ Speculative-Grade Debt, Aug. 10, 2009
-- Criteria Methodology: Business Risk/Financial Risk Matrix Expanded, May 27, 2009