September 5, 2017 / 11:26 AM / a year ago

Fitch: Synlab's Proposed Loan Facilitates Growth, Consolidation; No Rating Impact

(The following statement was released by the rating agency) LONDON, September 05 (Fitch) Synlab Bondco PLC's (Synlab) announced EUR300 million term loan does not impact its ratings, Fitch says. It will, however, help accelerate investment in growth and support consolidation of the fragmented European laboratory testing markets. See below for a full list of issuers and ratings. Synlab's announcement of the new loan in addition to the EUR250 million equity injection received in April 2017, will increase its financial flexibility and support its growth strategy. Fitch now estimates that total acquisition spending in 2017 will reach more than EUR500 million, given that the company has already spent more than EUR340 million in the first seven months to July 2017. We therefore expect an acceleration of the "buy-and-build" strategy consolidating the fragmented laboratory testing market with acquisitions. Synlab's M&A strategy follows two distinct routes comprising smaller bolt-on acquisitions to increase the scale of its existing regional laboratory networks (guided to be around EUR200 million pa), and strategic larger acquisitions adding product and geographic diversification. An example of the latter was the ALcontrol acquisition, adding environmental testing to the group's capabilities. Acquisition multiples vary between these two types of acquisition targets, but we assume an average EV/EBITDA acquisition multiple post synergies of around 8.0x in our four-year rating case, which adds growth and deleveraging capacity to the business. Fitch also views these acquisitions as generally carrying low execution risk. Management has a good track record integrating larger business combinations such as the Labco/Synlab integration. Synlab's financial leverage upon completion of this loan transaction will remain high, with FFO adjusted leverage around 7.5x at year-end 2017 (adjusted for acquisitions). Although such leverage is high for the 'B' rating level, the rating is supported by adequate free cash-flow (FCF) generation, projected on average at 5.0% over Fitch's four-year rating horizon, as well as by a defensive business model, which increasingly benefits from scale advantages and diversification as the rapid growth strategy is implemented. The "buy-and-build" strategy across the routine testing segment makes sense leading to the consolidation of a previously very fragmented market across Europe. We also believe that this strategy still has some way to go before concentration issues may arise. Our rating factors continued pressure on reimbursement rates, which we believe will be an ongoing feature of this health-care subsector as the implementation of Synlab's growth strategy remains subject to individual health-care legislation characterised by pricing pressure as routine lab testing services are commoditised in the future and may not even require a full doctor involvement. In our view, top-line growth will be supported by increasing volumes in a deflationary environment, with profitability enhancement coming from scale benefits and synergies. Hence Fitch assesses a sustainable EBITDA margin for this business at around 20%. Fitch rates Synlab 'B' with Stable Outlook and we assign a 'B+' instrument rating to the senior secured debt, one notch above the IDR, to reflect our expectation of above-average recovery in our hypothetical default analysis based on a going-concern distressed valuation. FULL LIST OF RATINGS Synlab Unsecured Bondco PLC -- Long-Term IDR 'B'; Stable Outlook -- Senior notes 'CCC+'/'RR6'/0% Synlab Bondco PLC --Senior secured RCF 'BB'/'RR1'/100% --Senior secured notes 'B+'/'RR3'/55% Contact: Frank Orthbandt Director +44 20 3530 1037 Fitch Ratings Limited 30 North Colonnade London E14 5GN Peter Wormald Analyst +44 203 530 1357 Media Relations: Adrian Simpson, London, Tel: +44 203 530 1010, Email: Additional information is available on 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 WEB SITE AT WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. 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