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Fitch Upgrades Fresenius to 'BBB-'; Outlook Stable
July 29, 2016 / 4:03 PM / a year ago

Fitch Upgrades Fresenius to 'BBB-'; Outlook Stable

(The following statement was released by the rating agency) FRANKFURT/BARCELONA/LONDON, July 29 (Fitch) Fitch Ratings has upgraded Fresenius Medical Care AG & Co. KGaA's (FMC) and Fresenius SE & Co. KGaA's (FSE; together Fresenius) Long-Term Issuer Default Ratings to 'BBB-' from 'BB+'. The Outlooks are Stable. Fitch has also upgraded the Short-Term IDR to 'F3' from 'B'. A full list of rating actions is below. The upgrade reflects Fresenius' improving business risk profile, driven by its increasing scale and diversification in its selective healthcare operations, which is translating into strong profitability and cash generation. In addition, Fitch views the underlying operations as mature and defensive with low cyclicality and volatility of earnings. A strong business profile would point to a solid rating in the 'BBB' category relative to peers. The 'BBB-' IDR balances Fresenius' strong business risk profile, with a financial structure that based on Fitch's leverage metrics, would be consistent with a lower rating. However, the upgrade considers the group's improving financial risk profile, following a period of lower acquisition activity and focus on integration and organic growth. We expect Fresenius to continue its successful acquisition strategy, albeit less strategic and more bolt-on in nature, in line with the company's unchanged financial targets. Even though we expect future acquisitions could stretch financial leverage for the rating, this is mitigated by the defensive and resilient qualities of the underlying businesses, creating significant deleveraging ability for the group, which also supports the Stable Outlook. KEY RATING DRIVERS Improved Diversification, Market Positions Drives Upgrade The upgrade reflects our view that all four business segments have achieved relative size and maturity, which contribute to the group's improved profitability and cash generation. FSE's business risk profile continues to improve through organic growth and acquisitions in non-dialysis areas. Fresenius is now less reliant on one single treatment area and has improved geographic diversification, albeit with a strong focus on developed markets. We view the improved business risk profile as a key driver of the upgrade to investment grade. Deleveraging Ability Supports Financial Profile The 'BBB-' IDR is underpinned by a resilient operating performance with Fitch projecting an EBIT margin trending towards 15% (EBITDAR margins trending above 20%), and free cash flow (FCF) margins above 3.5%. This reflects the group's satisfactory deleveraging ability and strong debt service coverage ratios (funds from operations (FFO) fixed charge coverage trending towards 4.0x). Following significant debt-funded acquisitive growth, the company has engaged in integration and organic growth, and we expect financial leverage will reduce below 4.0x on an FFO adjusted net basis by FYE16. This remains high for investment grade but is compensated by the strength of the group's business profile. Acquisitions to Continue, Financial Policies Unchanged In line with the company's financial policies (targeting net debt/EBITDA of 2.5x-3.0x), we note that Fresenius continues to increase its flexibility to further explore growth through acquisitions. We believe these will increasingly be bolt-on and synergistic in nature rather than strategic. We consider future acquisitions could stretch financial leverage temporarily for the rating. However, this should be mitigated by the defensive and resilient qualities of the underlying businesses creating significant deleveraging ability for the group, which also supports the Stable Outlook. Mature Operations, Defensive Revenues Fitch believes the underlying revenue streams of the four business segments to be defensible and correlated with the general positive healthcare industry trends. These are characterised by an ageing population, increase in chronic diseases and improving access to healthcare. However, this is counterbalanced by the growing pressure on healthcare budgets in times of austerity. We identify this as a key risk for Fresenius as its operations are predominantly exposed to developed markets (US and Europe) where issues around healthcare costs and productivity are most pressing. FMC is also responding to reimbursement pressures by establishing a more service orientated Care Coordination concept. This offers greater value to the healthcare system, leading to more defensible revenue streams. Debt Recoveries and Instrument Ratings As the rating is now investment grade, Fitch no longer differentiates the instrument ratings and aligns senior secured and senior unsecured ratings at 'BBB-'. Fitch expects priority ranking financial debt not to exceed 1.5x of EBITDA and hence not be sufficiently material to warrant a differentiation of the senior secured and senior unsecured instrument ratings. We believe that the enlarged scale and value in the business translates into similar recovery prospects for both instruments (as embedded in the rating) and hence align instrument ratings for senior and junior debt with the IDR. In addition, we expect future refinancing to favour unsecured instruments, further reducing structural and contractual subordination within Fresenius's capital structure. LIQUIDITY AND DEBT STRUCTURE Adequate Liquidity The group has unutilised committed credit facilities available of EUR3.4bn (of which around EUR2bn is available at the FMC level), in addition to EUR538m of cash, which Fitch considers as readily available for debt repayment at the FSE level. The group's consolidated annual FCF has been between EUR0.6bn-EUR1.2bn over the past four years and we expect positive FCF generation - likely in excess of EUR1bn per year - to continue for the next four years. Capital Structure Considerations Fitch views the linkage between FMC and FSE as strong given the consolidation of FMC, management control, shared finance function (albeit no cash pooling) and some cross default provisions from FMC to FSE. We therefore apply the IDR to the consolidated group, reflecting both entities' similar financial profiles and guidelines. KEY ASSUMPTIONS Fitch's expectations are based on the agency's internally produced, conservative rating-case forecasts. They do not represent the forecasts of rated issuers individually or in aggregate. Key Fitch forecast assumptions are: - Underlying growth in patient volumes as well as the built out of Care Coordination at FMC offsets on-going reimbursement rate pressure - Various efficiency measures mitigate margin erosion due to rising cost of care - Bolt-on acquisitions of up to USD400m per year at FMC; no strategic acquisitions assumed, which Fitch considers as event risk - Low to mid-single digit revenue growth at Kabi and Helios; high single digit at Vamed - Flat group EBITDA margin of around 18%-19% - Capex of 5%-6% of sales per year - Cash at FMC not readily available for debt service at FSE (other than via dividends) - Consolidated approach under Fitch Parent-Subsidiary Rating Linkage criteria RATING SENSITIVITIES Future developments that may, individually or collectively, lead to negative rating action including a revision of the Outlook to Negative: - Regulatory action leading towards increasing revenue volatility and negative effects on profitability and cash flow generation with EBITDAR margin under 19% (FY15: 21%) and FCF margin reducing to below 2.0% (FY15: 4.4%) - Deteriorating FFO adjusted net leverage expected to move sustainably above 4.5x (FY15: 4.1x) and FFO fixed charge cover to remain at or below 3.0x (FY15: 3.4x) either due to acquisitions and/or changes to financial policies or sustained deteriorating in operating environment. Fitch views an upgrade unlikely in the near term based on the company's financial policies. However, future developments that may, individually or collectively, lead to positive rating action include FFO adjusted net leverage to fall below 3.5x and FFO fixed charge cover to improve above 4.0x on a sustained basis, while maintaining continued solid, profitable and cash generative operations. FULL LIST OF RATING ACTIONS FSE Long-Term IDR: upgraded to 'BBB-' from 'BB+' Outlook Stable Senior unsecured debt: upgraded to 'BBB-' from 'BB+' Senior secured debt: affirmed at 'BBB-' Short-Term IDR/Commercial Paper rating: upgraded to 'F3' from 'B' Fresenius Finance B.V.: Guaranteed senior notes: upgraded to 'BBB-' from 'BB+' Fresenius US Finance II Inc.: Guaranteed senior notes: upgraded to 'BBB-' from 'BB+' FMC: Long-Term IDR: upgraded to 'BBB-' from 'BB+'; Outlook Stable Senior unsecured debt: upgraded to 'BBB-' from 'BB+' Senior secured debt: affirmed at 'BBB-' Short-Term IDR: upgraded to 'F3' from 'B' Contact: Principal Analyst Paul-Antoine Conti Director +44 20 3530 1292 Supervisory Analyst Frank Orthbandt Director +44 20 3530 1037 Fitch Ratings Limited 30 North Colonnade London E14 5GN Committee Chairperson Pablo Mazzini Senior Director +44 20 3530 1021 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com. SUMMARY OF KEY FINANCIAL ADJUSTMENTS -Lease capitalisation: we apply a blended capitalisation multiple of 6.4x instead of 8x to reflect the exclusion of annual operating lease charges relating to an estimate of short-life assets. The full lease amount is however included in our FFO fixed charge cover computation. -Readily available cash: Fitch considers cash held at FMC (EUR506m) as restricted for debt service at FSE as this would need to be upstreamed through dividends. As cash management for healthcare operators does not have pronounced seasonal cycles, Fitch does not make further adjustments to the group's readily available cash. Additional information is available on www.fitchratings.com. For regulatory purposes in various jurisdictions, the supervisory analyst named above is deemed to be the primary analyst for this issuer; the principal analyst is deemed to be the secondary. Applicable Criteria Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 17 Aug 2015) here Recovery Ratings and Notching Criteria for Non-Financial Corporate Issuers (pub. 05 Apr 2016) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here _id=1009709 Solicitation Status here Endorsement Policy here ail=31 ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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