Fitch Ratings has affirmed
Fitch also affirmed Inovie's Long-Term Issuer Default Rating (IDR) at 'B' with a Stable Outlook.
The affirmation follows the pricing of the add-on TLB and the receipt of final documentation that was substantively in line with the draft documentation provided by the company.
The 'B' IDR of Inovie reflects its smaller scale than rated peers' and its high financial leverage, pro-forma for its announced M&A and contemplated changes in its capital structure. This is compensated by its strong position in the highly regulated and non-cyclical French lab-testing market and strong profitability. Our expectation of robust free cash flow (FCF) generation implies sound deleveraging capabilities, albeit subject to the group's future financial policy, including the profile and funding of future acquisitions.
The Stable Outlook reflects Fitch's expectation that Inovie will maintain some deleveraging capacity, with manageable execution and adequate financial flexibility to implement its future growth strategy.
Key Rating Drivers
Sustainable Business Model: The rating continues to reflect our view of Inovie's sustainable business model in a defensive sector. The group is the third-largest network of private medical-testing laboratories in
M&A to Drive Growth: In 2021 Inovie announced bolt-on acquisitions worth close to
Subdued French Market Growth: We assume the non-cyclical and highly regulated French private lab-testing market to show muted growth (0%-2%) over the next three years, with volume increases offset by lower prices. The market is rapidly consolidating but still has multiple independent laboratories and small laboratory chains.
Positive Near-Term Covid-19 Impact: While the initial lockdown temporarily reduced the sales and profit margins of Inovie's routine-testing business, this was more than offset in 2020 by Covid-19 tests of around
Covid-19 Contribution to
Some Diversification Benefits: We view Inovie's diversification in the specialty test (around 15% of non-Covid-19 revenue) as beneficial, as these tests are less regulated (not included in the budgetary scope governed by the triennial act) and offer long-term growth opportunities. We view Inovie as firmly placed to withstand potential tariff pressure relative to smaller peers, given its critical size and operational efficiencies.
Strong Cash Flow: We expect Inovie's non-Covid-19 EBITDA margin to have expanded towards 30% in 2021 and to rise to 32% by 2023. The higher margin will mostly be driven by the agreed re-alignment of the salary of partner biologists to market standards, optimisation of the ratio of biologists per lab and a reduction of reagent costs. We expect this to increase FCF margin to the low teens, higher than the levels achieved by
Financial Policy Drives Rating Trajectory: We expect Inovie's buy-and-build M&A strategy to allow for satisfactory deleveraging, subject to multiples paid for lab targets, and the financing mix (including equity reinvested by biologists of acquired labs). We deem its
Exceptionally high Covid-19 test activity in 2021 will result in moderate leverage. We expect funds from operations (FFO) adjusted gross leverage to stabilise at 6.5x-7.0x, and total adjusted debt/ operating EBITDAR below 5.5x over 2023-2025 once Covid-19 activity normalises, which is adequate for the rating. We expect Inovie to finance bolt-on acquisitions with FCF.
Derivation Summary
Inovie's 'B' IDR is in line with that of Laboratoire Eimer Selas (Biogroup; B/Stable) and below that of
Inovie is smaller in scale and less diversified geographically than its rated peers, making it highly exposed to the French market and to potential reimbursement changes in the medium term.
Inovie's leverage is lower than Biogroup's but much higher than
Compared with investment-grade global medical diagnostic peers such as
Inovie's rating is supported by our expectation of strong profitability and cash flow generation. Inovie's expected profitability is higher than
Key Assumptions
Fitch's Key Assumptions Within Our Rating Case for the Issuer
Organic sales growth of non-Covid-19 business at 2.2% in 2021, 1% in 2022 and 0.5% p.a. over 2023-2025
Covid-19 revenue above
Group EBITDA margin around 38% in 2021 and around 32% over 2022-2025, with EBITDA margin of non-Covid-19 business at 30% in 2021, 31% in 2022 and 32% in 2023-2025. EBITDA margin of Covid-19 business at 50% in 2021, 40% in 2022 and 35% in 2023-2025
Acquisitions for a total amount of
Annual bolt-on acquisitions assumed at a 10x EBITDA and 20%-financed with equity related to biologists reinvesting in the business
Capex at 1.9% of revenue in 2021, followed by 2.5% to 2025
Operating leases at 4% of revenue, excluding Covid-19 tests from 2021 onwards
Taxes paid at 23% of EBITDA from 2022 to 2025
Dividend of
RECOVERY ANALYSIS ASSUMPTIONS
In Fitch's recovery analysis, we follow a going-concern (GC) approach as this leads to higher recoveries than a liquidation approach in the event of bankruptcy.
GC EBITDA (post-announced acquisitions) estimated at
Distressed enterprise value (EV)/EBITDA multiple of 5.5x, which implies a discount of 0.5x against the 6.0x multiple used for more geographically diversified and larger peers
Committed revolving credit facility (RCF) of
After deducting 10% for administrative claims from the estimated post-distress EV, our waterfall analysis generates a ranked recovery for the senior secured debt (including RCF and TLB) in the 'RR3' band, indicating a 'B+' instrument rating for the enlarged TLB, with a waterfall-generated recovery computation of 52%.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
A larger scale and/or increased product/geographical diversification, while maintaining EBITDA margin
Total adjusted debt/operating EBITDAR below 5.0x, or FFO adjusted gross leverage trending towards 6.0x on a sustained basis (pro-forma for acquisitions)
FFO fixed charge coverage above 3.0x on a sustained basis (pro-forma for acquisitions)
Factors that could, individually or collectively, lead to negative rating action/downgrade:
Loss of M&A target selection discipline leading to weak operating performance, continued dividend payment policy leading to increased leverage and/or adverse regulatory changes eroding profitability
Total adjusted debt/operating EBITDAR above 6.5x, or FFO adjusted gross leverage above 8.0x on a sustained basis (pro-forma for acquisitions)
FFO fixed charge coverage below 2.0x on a sustained basis (pro-forma for acquisitions)
FCF margin in low single digits on a sustained basis
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
Comfortable Liquidity: We estimate Inovie to have had around
Our expectation of consistently positive FCF generation also enhances Inovie's liquidity profile and financial flexibility.
Issuer Profile
Inovie operates the third-largest network of private medical-testing laboratories 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
Inovie has an ESG Relevance Score of '4' for Social Impacts, due to its exposure to the French regulated French medical lab-testing market, which has a negative impact on the credit profile, and is relevant to the rating in conjunction with other factors. The French medical lab-testing market is subject to pricing and reimbursement pressures as governments seek to control national healthcare spending. Adverse regulatory changes in the lab-testing services sector may, therefore, have a negative impact on Inovie's ratings. This is, however, mitigated by the 2020-2022 triennial plan agreement, providing some market growth and earnings visibility until
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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