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Rating Action:

Moody's affirms Fresenius Medical Care's Baa3 rating; outlook stable

04 May 2021

Frankfurt am Main, May 04, 2021 -- Moody's Investors Service ("Moody's") has today affirmed Fresenius Medical Care AG & Co. KGaA's (FMC) Baa3 long-term issuer rating. Concurrently, the agency has also affirmed the instrument ratings on the group's senior unsecured notes at Baa3, senior unsecured syndicated facilities at Baa3 and the group's senior unsecured EMTN programme rating at (P)Baa3. The outlook on all ratings remains stable.

"Today's rating action reflects FMC's defensive non-cyclical business profile with good growth prospects over the next 3-5 years offsetting the temporary earnings pressure we expect in 2021 as a result of Covid-19. However, FMC is weakly positioned in its rating category and its credit profile has limited headroom to accommodate acquisitions rather than small bolt-on deals as long as its earnings remain depressed by the pandemic", says Vitali Morgovski, a Moody's Assistant Vice President -- Analyst and lead analyst for FMC. "We expect credit metrics to return to historical levels by 2022, supported by an anticipated recovery of operating performance", Mr. Morgovski continues.

A full list of affected ratings can be found at the end of this press release.

RATINGS RATIONALE

The operating performance of FMC in 2020 was robust with a 2% revenue growth (up 5% at constant currencies) and a 7% growth in Moody's adjusted EBITDA as the number of dialysis treatments across the company's global network continued to grow by around 3%. However, excess mortality among dialysis patients significantly accelerated in November and December 2020, inducing FMC to announce a profit warning in February 2021. While revenue is still expected to grow by low-to-mid single digits in 2021, net income is guided to decline by high-teens to mid-twenties. Nevertheless, the long term growth trend for dialysis treatments remains intact, which should support a recovery of operating performance by 2022.

FMC's credit metrics as adjusted by Moody's were solid at the end of 2020 with gross leverage ratio at around 3.4x and €1.8 billion in Moody's adjusted free cash flow, which was strong even considering c. €900 million extraordinary advance payments received in the US under the CMS Accelerated and Advance Payments programme. Earnings were also supported by €249 million the company received under the US federal relief funding the CARES Act. Though, the anticipated underutilization of clinics as well as additional Covid-19 related costs in absence of further government relief funds will lead to the weakening of credit metrics. Moody's expects FMC's gross leverage to exceed 4x in 2021 before declining to 3.7x -- 3.9x in 2022.

Moreover, Moody's foresees that the group's FCF (as adjusted by Moody's after lease repayment and dividend distribution) may turn negative in 2021 (€200-€400 million) for the first time in the last at least fifteen years as earnings decline, advanced payments reverse while FMC's dividends to own shareholders continue to increase. This would position the company weakly in its rating category.

Nevertheless, Moody's expects that growth in dialysis patients globally will continue at 3-5% pace per year (3% in 2020) as there are no viable alternatives for end-stage renal disease (ESRD) patients to dialysis apart from the kidney transplantation. Despite extensive effort to increase awareness of kidney donation, demand still significantly exceeds supply so that for over 80% of ESRD patients regular dialysis is the only treatment of choice. Moody's thinks that FMC's market position as the largest vertically integrated dialysis provider worldwide together with the growing penetration of home dialysis in the US and better access to dialysis services and products in Emerging Markets will allow FMC to return to its previous growth path from 2022 with a corresponding recovery in its credit metrics and cash flow generation.

FMC's rating is mainly supported by (1) the group's strong defensive business profile, underpinned by its large absolute scale and recurring nature of its revenue stream as patients receive lifesaving dialysis treatment typically thrice a week; (2) strong market position as a leading vertically integrated provider of dialysis products and services globally; (3) steadily growing number of dialysis patients globally, driven by aging population and an increase in lifestyle diseases, such as high blood pressure and diabetes, which often impair the kidney function; (4) the fact that FMC is an integral part of a larger and more diversified healthcare group Fresenius SE & Co. KGaA (FSE); and (5) its track-record of sustainably positive FCF generation.

However, the rating is constrained by (1) the anticipated temporary earnings weakness in 2021 as a result of excessive mortality among FMC's patient base due to Covid-19 pandemic and hence elevated leverage in the next 12-18 months; (2) a relatively aggressive shareholder remuneration recently evidenced by 11% increase in dividends despite expected earnings decline in 2021; (3) an acquisitive business strategy targeting to continue adding new patients and clinics as well as investments in complementary assets; (4) regional concentration in North America (70% of sales in 2019), where adverse changes in regulatory environment or the payer mix can have materially negative impact on FMC's revenue and profitability; and (5) exposure to tightening healthcare budgets globally and greater regulatory barriers and higher complexity of expansion in Emerging Markets.

RATIONALE FOR STABLE OUTLOOK

The stable outlook reflects Moody's expectation that FMC will return to profitable revenue growth once the Covid-19 pandemic abates and the company will continue generating sustainably positive FCF. Furthermore, Moody's expects that the company will balance its organic and inorganic investment opportunities with its leverage commitment, allowing Moody's adjusted leverage ratio to maintain within the 3-4x range.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

WHAT COULD MOVE THE RATINGS - UP

Positive rating pressure could arise if:

• Moody's adjusted gross debt/EBITDA declines sustainably below 3x;

• Moody's adjusted retained cash flow/ net debt increases sustainably above 20%;

• More prudent management of the group's liquidity, with early refinancing of upcoming maturities.

WHAT COULD MOVE THE RATINGS -- DOWN

Conversely, negative rating pressure could arise if:

• Moody's adjusted gross debt/EBITDA exceeds 4x on a sustained basis;

• Moody's adjusted retained cash flow/ net debt declines below 15% on a sustained basis;

• Negative FCF generation.

LIQUIDITY

The liquidity of FMC is adequate. As of year-end 2020, the company had approximately €1.1 billion of cash on its balance sheet and access to around €1.3 billion equivalent of undrawn syndicated revolving credit facility, which matures in July 2022, and had only €20 million of commercial paper outstanding out of its €1 billion CP programme. In addition, FMC had around €0.5 billion capacity under the company's committed accounts receivable facility (which has a size of $900 million, subject to eligible receivables) as well as further availabilities under committed and uncommitted short-term bilateral facilities.

On the other side, FMC had sizeable debt maturities with close to €1 billion in 2021 (€300 million and $650 million bonds were already repaid in February 2021) and €1.6 equivalent billion in 2022. The group's operating cash flow generation should be sufficient to cover business usual cash needs such as capital spending, working capital consumption and dividend payment, however the sizable upcoming maturities need to be refinanced timely to avoid deterioration in liquidity.

ESG CONSIDERATIONS

Social considerations are material to FMC's credit profile. Similar to other private hospitals/ pharmaceutical companies, FMC maps to high risk on our social risks heat map. The company is exposed to the ongoing regulatory and legislative efforts aimed at reducing healthcare costs, especially in the US.

In terms of its legal structure, a KGaA is a mixture of a joint-stock corporation and a limited partnership, with an inclination toward stock corporation law. The rights and duties of the supervisory board of a KGaA are more limited than those of the supervisory board of a joint stock corporation. Through its full ownership of the Sole General Partner (Fresenius Medical Care Management AG), Fresenius SE & Co. KGaA controls FMC, although it owns only approximately 32% of its ordinary shares. Given this ownership structure, FMC has limited ability to raise equity to reduce leverage. A large share issuance by FMC diluting FSE's ownership to below 25% (if FSE would not participate) would lead to a loss of ownership for Fresenius SE & Co. KGaA, which in our view is unlikely to occur.

LIST OF AFFECTED RATINGS:

..Issuer: Fresenius Medical Care AG & Co. KGaA

Affirmations:

.... LT Issuer Rating, Affirmed Baa3

....Senior Unsecured Bank Credit Facility, Affirmed Baa3

....BACKED Senior Unsecured Medium-Term Note Program, Affirmed (P)Baa3

....BACKED Senior Unsecured Regular Bond/Debenture, Affirmed Baa3

Outlook Actions:

....Outlook, Remains Stable

..Issuer: Fresenius Medical Care US Finance II, Inc

Affirmations:

....BACKED Senior Unsecured Regular Bond/Debenture, Affirmed Baa3

Outlook Actions:

....Outlook, Remains Stable

..Issuer: Fresenius Medical Care US Finance III, Inc.

Affirmations:

....BACKED Senior Unsecured Regular Bond/Debenture, Affirmed Baa3

Outlook Actions:

....Outlook, Remains Stable

PRINCIPAL METHODOLOGY

The principal methodology used in these ratings was Business and Consumer Service Industry published in October 2016 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1037985. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

COMPANY PROFILE

Headquartered in Bad Homburg, Germany, Fresenius Medical Care AG & Co. KGaA (FMC) is the world's leading provider of dialysis products and dialysis services. In 2020, the group's revenue amounted to €17.9 billion. The company is publicly listed with a current market capitalization of around €19 billion. FMC is controlled by Fresenius SE & Co. KGaA (Baa3 stable), which owns approximately 32% of the company but controls 100% of the general partner of FMC, given FMC's legal status of a Kommanditgesellschaft auf Aktien (KGaA, partnership limited by shares).

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1263068.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Vitali Morgovski, CFA
Asst Vice President - Analyst
Corporate Finance Group
Moody's Deutschland GmbH
An der Welle 5
Frankfurt am Main 60322
Germany
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Christian Hendker, CFA
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Releasing Office:
Moody's Deutschland GmbH
An der Welle 5
Frankfurt am Main 60322
Germany
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

No Related Data.
© 2021 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.

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