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Rating Action:

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

15 Aug 2022

Frankfurt am Main, August 15, 2022 -- Moody's Investors Service ("Moody's") has today affirmed Fresenius Medical Care AG & Co. KGaA's (FMC or the company) Baa3 long-term issuer rating. The outlook remains stable.

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

RATINGS RATIONALE

Today's rating affirmation with stable outlook reflects Moody's expectations that current operating headwinds are mostly temporary. During this period of subdued operating performance, which will likely last until end of 2023, Moody's expects FMC will remain fully committed to its investment grade rating by prioritizing its public commitment to the 3-3.5x net leverage range over capital allocation to M&A and shareholders' distribution. The rating as of today is weakly positioned. Downward rating pressure could increase over time in case operating headwinds turn to be more structural in nature and the company is not able to show revenue growth and margin improvement in the next 12-18 months or if it departs from its public 3-3.5x net leverage commitment.    

Today's rating action comes in the context of a weakening trend in FMC's operating performance which started end of 2020 when COVID-19 related excess mortality amongst its patient base started to rise. While excess mortality significantly declined during Q2 2022 post Omicron wave, Moody's expects 2022 operating performance to be strained by an unprecedented shortage of personnel in the company's US operations, which constrains the company's ability to accept new patients with further pressure from accelerated wage inflation (a social risk under Moody's ESG framework), but also by cost inflation (higher logistics costs, raw material and energy prices) and supply chain disruptions resulting from the worsening macro-economic conditions. Though nursing shortages are not new, the pandemic has made unprecedented demands on the nursing and clinical professions and led to burnout and resignations. Many companies in the healthcare sector in the US have had to either rely on temporary contract and agency labor, which is notably more expensive than permanent workers, or increase compensation and bonuses above historical averages, to attract and retain talent, resulting in wage inflation. The situation is currently significantly more acute in the US than in Europe.

Today's rating affirmation reflects Moody's view that these operating headwinds are mostly temporary and that FMC's business model should be resilient through the cycle as it is exposed to a structurally growing sector with high barriers to entry and little substitution risk. There are currently no viable alternatives for end-stage renal disease patients to dialysis apart from the kidney transplantation. Patients who currently cannot be accepted into dialysis clinics because of lack of personnel are given medication which are prescribed by nephrologists, but such measure can only be temporary according to FMC. The number of dialysis patients should return to growth driven by ageing population, increase in lifestyle diseases, growing penetration of home dialysis in the US and improved access to medical care especially in emerging markets.

As a result, Moody's forecasts that FMC's credit metrics will remain weak during 2022 and a large part of 2023. Nonetheless, Moody's expects that in the next 12-18 months, FMC will improve margins thanks to operating leverage as the business gradually returns to growth, benefits from its costs saving measures and regulated fee increases. Credit metrics are expected to return to levels commensurate with the current rating by 2024. Any deviation against these expectations would put downward pressure on the rating.  

However, risks are skewed to the downside as global credit conditions have turned more negative and credit stress is increasing. Key risks to manage for FMC over the next 18 months are labor shortages, high inflation and supply chain disruptions. As dialysis services are essential to treat life-threatening conditions and services are mostly reimbursed, Moody's expects that demand will be mostly recession-proof, except if a significant number of patients lose their commercial insurance in the US or the healthcare authorities sustainably reduce funding.

FMC's rating remains supported by (1) its strong defensive business profile, underpinned by its large absolute scale and the recurring nature of its revenue stream as patients receive lifesaving dialysis treatment typically two to three times a week; (2) a strong market position as a leading vertically integrated provider of dialysis products and services globally; (3) expectation of 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; and (5) its track record of positive free cash flow generation historically.

However, the rating is constrained by (1) the company's current high leverage resulting from a strained operating performance since the beginning of the pandemic, (2) an acquisitive business strategy historically aiming at adding new patients and clinics as well as investments in complementary assets; (3) regional concentration in North America (around 70% of sales in 2021), where adverse changes in the regulatory environment or the payer mix can have materially negative impact on FMC's revenue and profitability; (4) exposure to tightening healthcare budgets globally and greater regulatory barriers and higher complexity of expansion in Emerging Markets; (5) a shareholder oriented remuneration policy with a dividend per share which has increased for 25 consecutive years.

OUTLOOK RATIONALE

Because of the current weak credit metrics, in particular leverage and free cash flow, the rating is weakly positioned. The stable outlook reflects Moody's expectations that operating performance and credit metrics will improve from 2023 onwards as the negative effects from the pandemic (excess mortality and acute labor shortage), inflationary pressure and supply chain disruptions gradually ease. Moreover, the stable outlook assumes that FMC will remain committed to its investment grade rating by prioritizing its public commitment to its 3-3.5x net leverage range over capital allocation to M&A and shareholders' distribution.

LIQUIDITY

The liquidity of FMC is good. As of end June 2022, the company had approximately €1.0 billion of cash on its balance sheet (representing 6% of its revenue) and access to an undrawn €2 billion syndicated senior unsecured revolving credit facility. Moody's projects the Moody's adjusted free cash flow (after lease repayment and dividend distribution) to be slightly negative in 2022 and break even in 2023.

In addition, and as of end June 2022, FMC had around €0.6 billion capacity (out of €0.7 billion total) under other bilateral uncommitted credit facilities, €0.5 billion capacity (out of €0.7 billion total eligible receivables) under its three-year committed $ 0.9 billion account receivable facility and €0.5 billion capacity (out of €1.5 billion total) under its commercial paper program.

As of June 2022, next debt maturities include €650 million in Q4 2023, which Moody's expects, will be managed proactively. FMC has a separate financing and no joint financing facilities or mutual guarantees with Fresenius SE & Co. KGaA.

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

Given the weak positioning of the rating, an upgrade is unlikely in the short-term. 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%; the company establishes a longer track record of prudent management of the group's liquidity, with early refinancing of upcoming maturities.

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 and/or negative free cash flow generation for a prolonged period.

ESG CONSIDERATIONS

Social considerations are material to FMC's credit profile. Similar to other private hospitals/ and pharmaceutical companies, FMC maps to high risk on Moody's social risks heat map given the highly regulated nature of the healthcare industry and the sensitivity to societal pressures related to the affordability of, access to and quality of healthcare services. High social risks reflect the company's exposure to pricing and reimbursement pressure, risks derived from the direct contact with patients (e.g. reputation, potential liability in case quality deteriorates), its exposure to human capital risks (e.g. shortage of skilled personnel) as well as cyber risk since the company handles private data.

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. FMC's structure includes minority interests since minority shares of the clinics are owned by doctors.

LIST OF AFFECTED RATINGS

Affirmations:

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

.... LT Issuer Rating, Affirmed Baa3

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

....BACKED Senior Unsecured MTN Program, Affirmed (P)Baa3

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

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

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

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

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

Outlook Actions:

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

....Outlook, Remains Stable

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

....Outlook, Remains Stable

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

....Outlook, Remains Stable

PRINCIPAL METHODOLOGY

The principal methodology used in these ratings was Business and Consumer Services published in November 2021 and available at https://ratings.moodys.com/api/rmc-documents/356424. Alternatively, please see the Rating Methodologies page on https://ratings.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 2021, the group's revenue amounted to €17.6 billion. The company is publicly listed but controlled by Fresenius SE & Co. KGaA, 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 on https://ratings.moodys.com/rating-definitions.

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 issuer/deal page for the respective issuer on https://ratings.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 https://ratings.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 https://ratings.moodys.com/documents/PBC_1288235.

At least one ESG consideration was material to the credit rating action(s) announced and described above.

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 https://ratings.moodys.com.

Please see https://ratings.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 issuer/deal page on https://ratings.moodys.com for additional regulatory disclosures for each credit rating.

Perrine Bajolle
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

Anke Rindermann
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

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