Fitch Ratings has affirmed
The Rating Outlook for the Long-Term Local Currency IDR was revised to Negative from Stable, and Outlooks for the Long-Term Foreign Currency and National Long-Term Rating remain Stable.
The Negative Outlook on the Long-Term Local Currency IDR reflects a lower than expected deleveraging trend after investment peaks and operating recovery post-pandemic. The high debt burden with interest expenses, as well as high working capital requirements following industry dynamics have further dented FCF generation. Fitch forecasts Rede D'Or's net leverage ratio will remain above rating triggers of 2.5x until 2025, per the agency's criteria.
The company's ratings reflect the defensive nature of its business, solid competitive position in the fragmented hospital industry in
Key Rating Drivers
Deleverage Taking Longer: Rede D'Or's ability and willingness to effectively deleverage while managing aggressive business growth are key rating considerations. Considerations also include the company's ability to navigate a more challenging scenario in terms of higher operating costs and competitive environment.
The company has indicated it has passed its peak of organic and inorganic investments, which could alleviate pressure on free cash flow generation in the next two years. Fitch projects Rede D'Or's leverage ratio, per the agency's criteria, to reach 2.7x in 2023 and 2024 and 2.6x in 2025, without any extraordinary measure.
FCF to Remain Negative: The high debt burden and interest rates in
Fitch forecasts adjusted EBITDA (excluding IFRS-16) of around
Margins to Improve: Fitch expects Rede D'Or's consolidated adjusted EBITDA margins to improve to around 13% and 14% in 2024 and 2025, from 12.3% in 2023; the first year of consolidating
The company's margins compare well with global peers. The company has efficiently increased profitability through economies of scale and synergies from acquisitions. However, operating performance has been impacted by the pandemic, fewer high-complexity hospitalizations, high inflation and interest rates, and pressure from payors over the past two years. Fitch forecasts adjusted EBITDA (adjusted by IFRS-16) of around
Leading Business Position: Rede D'Or is the largest private hospital network in
The company's scale and strong brand act as strong barriers to entry over the medium term. The healthcare industry has positive long-term fundamentals, in light of the imbalance between supply and demand for hospital services in
Withstanding a Challenging Industry: Industry consolidation and the increasing vertical integration among competitors has increased competition. Post-pandemic, increasing medical loss ratios within healthcare operators, insurances, logistic supply issues within the medical drugs and devices companies, have impacted all peers. Business scale, strong brand and medical recognition are essential competitive advantages that mitigate increasing pressure from healthcare plan providers in terms of contracts pricing and working capital management. Fitch believes Rede D'Or is well positioned to face the ongoing developments in industry dynamics.
Country Ceiling Constrains: Rede D'Or's Long-Term Foreign Currency IDR is constrained by
Legal Contingencies: Rede D'Or is exposed to tax litigation that could result in loss, as no provisions have been recorded. The most significant,
Derivation Summary
Rede D'Or's ratings reflect
Compared with the Brazilian diagnostic and hospital competitor, Diagnostico da America S.A (
Rede D'Or, Auna, Einstein and
Rede D'Or's Long-Term Foreign Currency IDR is constrained by
Key Assumptions
Revenue growth reflecting ongoing acquisitions and greenfield/brownfields projects, with addition of around 400 operating beds during 2024 and around 1,000 during 2025;
Volume of daily-patients of 2.8 million in 2024 and 3.0 million in 2025;
Average hospital ticket (excluding oncology) at
Hospital beds occupancy rate around 79,5% in 2024-2025;
Hospital EBITDA margins around 26% in 2024-2025;
SulAmerica's medical loss ratio (MLR) around 85%-86% in 2024-2025;
Capex at
A 25% minimum dividend payout.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
Positive rating action for the Long-Term Foreign Currency IDR is limited by
Upward rating potential for Rede D'Or's 'BBB-' Long-Term Local Currency IDR is unlikely in the medium-term given the company's 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
A revision of the Outlook for the Local Currency IDR to Stable from Negative could occur if Fitch's forecasts indicates net leverage below 2.5x by 2025, due to strong than expected operating results, lower capex level and/or combination of non-core asset sales.
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;
Hospital operation EBITDA margin declining to below 22%;
Total leverage consistently above 4.0x and net leverage consistently above 2.5x by 2025;
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.
Liquidity and Debt Structure
Robust Liquidity: Rede D'Or has a track record of maintaining strong cash balances, while it navigates its aggressive growth strategy. The company had
Around 27% of Rede D'Or debt as of
The company's financial flexibility is solid, and the company has shown good access to local and cross-border capital markets. Fitch expects Rede D'Or will maintain a strong liquidity position and proactive approach in liability management to avoid exposure to refinancing risks.
As of
Issuer Profile
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
The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' 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. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit https://www.fitchratings.com/topics/esg/products#esg-relevance-scores.
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