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Rating Action:

Moody's assigns B2 CFR rating to Chrome HoldCo, outlook stable

04 May 2021

Frankfurt am Main, May 04, 2021 -- Moody's Investors Service ("Moody's") has today assigned a new B2 corporate family rating (CFR) and a new B2-PD probability of default rating (PDR) to Chrome HoldCo (Cerba), the new top entity of Cerba's restricted group. Concurrently, Moody's has assigned a B1 instrument rating to the proposed senior secured term loan B and a B1 instrument rating to the proposed senior secured revolving credit facility, issued by Chrome BidCo, a subsidiary of Chrome HoldCo. The outlook on Chrome HoldCo and Chrome BidCo is stable.

The proceeds from the proposed senior secured term loan B, along with other senior secured and senior unsecured debts as well as equity will be used to finance the acquisition of a majority stake in Cerba by EQT, with PSP reinvesting alongside management.

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

RATINGS RATIONALE

Today's rating action balances the significant re-leveraging effect from the contemplated transaction, which will increase the gross debt by around €700 million with the strengths of Cerba's business profile namely, the defensive demand drivers, the good track record of the company as a rated entity as illustrated by an organic growth above the peer group, high EBITDA margin and positive free cash flow generation.

Pro forma for the proposed refinancing, Moody's adjusted debt / EBITDA would reach 6.6x, based on FY 2020 EBITDA including COVID-19 impact.

Today's rating action also takes into account the current strong tailwind from COVID-19 testing activities. Cerba recorded a 35% revenue growth in 2020 driven by a strong acceleration of COVID-19 testing activities, mainly PCR testing, during Q3 and Q4. For 2020, the company estimates that its positive revenue impact from COVID-19 testing is €236 million, which is net of revenue lost on its core business due to the impact of lockdown and social distancing measures especially during the 1st wave of the pandemic. Thanks to scale effects, the boost from COVID-19 testing translated into margin expansion from 23.3% in 2019 to 29.6% in 2020 (Moody's adjusted EBITDA). In the context of the 3rd infection wave and the slow start of the vaccination roll-out, Moody's forecasts Q1 2021 to be a strong quarter in terms of PCR testing revenues in continental Europe. However, the rating agency expects that the volume of PCR tests will likely phase down over the course of 2021, since the need to detect the virus will likely diminish as vaccines become widely available. In the US and the UK, two countries ahead of continental Europe in terms of vaccines distribution, the monthly volume of PCR tests have already started to decline by around 30% and 20%, respectively, over the December 2020 to March 2021 period. The slope of the decline is highly uncertain and will depend on different factors including (i) the pace and efficiency of the current vaccines distribution, (ii) the emergence of new variants, (iii) the potential cannibalization from antigen and home tests, (iv) the risk of further reimbursement declines, (v) the future testing policies from the public authorities as lockdown measures are gradually lifted, and (vi) the need for serology testing. Beyond 2021, Moody's anticipates that the need for testing COVID-19 or other infectious diseases will likely remain but at levels which will probably be significantly lower than what the sector currently experiences. Testing will likely remain a central tool within the public authorities' ongoing surveillance, track and trace strategy especially during the winter season.

The rating agency recognizes the short term benefit of the strong COVID-19 testing activity expected for 2021 because it will support free cash flow generation which, once reinvested within the company e.g. through M&A or other initiatives, will translate into sustainable EBITDA improvement. The pandemic has highlighted the vital importance of testing for public health, certainly a positive for the sector in the medium term.

Moody's forecasts Cerba's revenue to grow further in 2021 driven by a strong contribution from COVID-19 testing as explained above. Beyond 2021, Moody's currently forecasts the exceptional boost from COVID-19 testing to gradually normalize. Moody's forecasts Cerba's underlying core organic growth to accelerate over the next 12-18 months driven by the conversion of a strong backlog in its central labs business and its international activities notably in Africa. The current rating is based on the expectation that underlying core organic growth coupled with bolt-on M&A mainly financed by internally generated cash flow will drive underlying EBITDA increase and a Moody's adjusted leverage of around 6.7x by 2023 when COVID-19 revenue will have normalized.

Financial policy is a key rating driver for the ratings. M&A has been a key pillar of Cerba's growth strategy historically especially in France. In a sector continuously subject to tariff cuts, inorganic growth allowed large networks to achieve economies of scale and efficiency gains. Business rationale, acquisition multiples and funding will be key drivers of the ratings of Cerba going forward. In order to maintain its B2 CFR, Cerba should demonstrate a willingness, in the context of its M&A strategy, to maintain its Moody's adjusted debt/EBITDA below 7.0x and its Moody's adjusted FCF/debt towards 5%.

Price pressure has been a credit constraint for the sector in the past. European public authorities have put tariff cuts on hold last year as the sector was seen as instrumental in the day to day fight against the coronavirus. In France, a 2.5% tariff cut has been agreed in April 2021 as part of the 2020-22 triennial agreement. In the other geographies where Cerba is present and similar tariff dynamics exist such as Belgium, Luxembourg or Italy, there is no planned tariff cuts at this stage. However, there is a risk that pricing pressure could increase over time as European governments grapple with the cost of supporting their economies during the pandemic.

OUTLOOK RATIONALE

The stable outlook reflects Moody's expectation that the operating environment will remain favorable for the next quarters as the additional volume from COVID tests will more than offset potential disruptions on core volume as long as the pandemic persists. The stable outlook also assumes that the company's M&A strategy will remain measured in terms of size, pace and acquisition multiple and that funding will not result in a Moody's adjusted debt / EBITDA higher than 7.0x.

LIQUIDITY

Cerba's liquidity is good supported by (1) €50 million cash on balance sheet after closing of the proposed transaction, (2) a new €325 million senior secured revolving credit facility undrawn at closing, (3) positive free cash flow expected for the next 12-18 months and (4) long dated maturities post contemplated refinancing.

ESG CONSIDERATIONS

Cerba has an inherent exposure to social risks, given the highly regulated nature of the healthcare industry and its sensitivity to social pressure related to the affordability of and access to healthcare services. Governance risks for Cerba include any potential failure in internal control that could result in a loss of accreditation or reputational damage and, as a result, could harm its credit profile. Given its private equity ownership, Moody's considers that Cerba has a relative aggressive financial strategy characterised by a tolerance for high financial leverage and shareholder-friendly policies such as the pursuit of debt-financed acquisitions.

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

Positive pressure could arise over time if (1) the Moody's-adjusted debt/EBITDA falls below 5.5x on a sustained basis and (2) the Moody's-adjusted FCF/debt improves towards 10% on a sustained basis.

Downward rating pressure could develop if (1) the leverage, as measured by Moody's-adjusted debt/EBITDA, does not remain below 7.0x on a sustained basis, (2) the Moody's adjusted FCF/debt does not remain close to 5% on a sustained basis and /or (3) the company's liquidity deteriorates.

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.

LIST OF AFFECTED RATINGS

Assignments:

..Issuer: Chrome BidCo

....Senior Secured Bank Credit Facility, Assigned B1

..Issuer: Chrome HoldCo

.... Probability of Default Rating, Assigned B2-PD

.... LT Corporate Family Rating, Assigned B2

Withdrawals:

..Issuer: Constantin Investissement 3 S.A.S.

.... Probability of Default Rating, Withdrawn , previously rated B2-PD

.... LT Corporate Family Rating, Withdrawn , previously rated B2

Outlook Actions:

..Issuer: Chrome BidCo

....Outlook, Assigned Stable

..Issuer: Chrome HoldCo

....Outlook, Assigned Stable

PROFILE

Cerba Healthcare S.A.S., headquartered in Paris, France, is a provider of clinical laboratory testing services in France, Belgium, Luxembourg, Italy and Africa and generated revenue of €1.3 billion for full year 2020.

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.

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 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.

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

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.
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