Fitch Ratings has affirmed
The Rating Outlook for the LT FC IDR is Negative, while the Outlooks for the LT LC IDR and the National LT Rating are Stable.
Rede D'Or's ratings reflect the defensive nature of its business, a solid competitive position in the fragmented hospital industry in
Key Rating Drivers
Leading Business Position: Rede D'Or is the largest private hospital network in
Country Ceiling Constrain: Rede D'Or's LT FC IDR is constrained by
Industry Consolidation: The recent consolidation and the increasing level of vertical integration among competitors in
Strong Growth Strategy: Fitch expects Rede D'Or to continue to pursue both organic and inorganic growth opportunities with the target to add more than 5,000 beds by 2025. Fitch expects this growth to be mostly financed with equity inflow from 2020/2021. The company has an aggressive track record of acquisitions, acquiring 28 hospitals, adding 3.5k operating beds, from 2017 to
The company seeks to diversify its service portfolio by expanding its ambulatory, oncology, and advisor/consultor activities, as well as seeks opportunities to increase verticalization, i.e. the diagnostics market segment.
Adequate Margins: The company has been efficient in increasing profitability through economies of scale and in achieving synergies from acquisitions. The company has a strong track record of turning around acquired assets. Rede D'Or's net revenue grew 106% between 2017 and LTM ended
Manageable Pandemic Impact: Rede D'Or's operations have been temporarily affected by the coronavirus pandemic, due to the postponement of elective surgeries and lower hospital visits because of strict social-distancing requirements. Nevertheless, recovery has been solid as seen during 3Q21, when the amount of Covid-19 cases fell in the country, driven by vaccine availability. Fitch's base case incorporates that the impact of new outbreaks and variants on Rede D'Or's profitability will be manageable.
Strong Credit Metrics: Fitch projects Rede D'Or's net leverage to range from 2.1x-2.2x in 2021-2023, considering ongoing capex and/or acquisition disbursements of up to
Legal Contingencies: Rede D'Or is exposed to tax litigation that could result in loss, as no provisions have been recorded. The most significant, in the amount of
Derivation Summary
Rede D'Or's ratings reflect
(BB-/Stable), Rede D'Or has stronger business scale and capital structure.
Rede D'Or compares well in terms of business scale and operating margins with the Brazilian non-for-profit hospital Sociedade Beneficente Israelita Brasileira Hospital
Compared to the Brazilian diagnostic and hospital competitor Diagnostico da America S.A (
Rede D'Or, Auna, Einstein and
On a global scale, the dynamics of the Brazilian hospital industry and regulation are not directly comparable to other countries. Rede D'Or's operating margins and financial metrics are quite sound compared with other rated hospitals within Fitch's global universe.
Key Assumptions
Fitch's Key Assumptions Within the Rating Case for the Issuer Include:
Revenue growth reflecting ongoing acquisitions and greenfield/brownfields projects;
EBITDA margins of around 24%-26%;
Working capital needs to remain on historical levels;
Average Capex of
A 25% minimum dividend payout.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
Positive rating action for the LT FC IDR is limited by
Upward rating potential for Rede D'Or's 'BBB-' LT LC IDR is limited by its ongoing aggressive growth strategy, through both organic and M&A movements, and its lack of geographic diversification, which leads to large exposure to the local economy in
Factors that could, individually or collectively, lead to negative rating action/downgrade:
A change in management's strategy with regard to its conservative capital structure could also lead to a downgrade, as could a deterioration in the company's reputation and market position;
EBITDA margins declining to below 20%;
Net leverage consistently above 2.5x;
Deterioration of a sound liquidity position leading to refinancing risk exposure;
Major legal contingencies that represent a disruption in the company's operations or a significant impact to its credit profile.
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 '
Liquidity and Debt Structure
Rede D'Or has a track record of maintaining strong cash balances, with an average coverage of cash/short-term debt ratio of 6.4x during the last four years, and coverage of 7.1x as of
The company had
Around 33% of Rede D'Or debt, as of
Issuer Profile
Rede D'Or is the largest private hospital player in
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.
ESG Considerations
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg
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