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Rating Action:

Moody's assigns B2 ratings to CAB, outlook negative

02 Dec 2019

Frankfurt am Main, December 02, 2019 -- Moody's Investors Service ("Moody's") has today assigned a B2 corporate family rating (CFR) and a B2-PD probability of default rating (PDR) to CAB (Biogroup-LCD or the company). Concurrently, Moody's has assigned a B2 senior secured rating to the company's €1,265 million term loan (including €240 million planned add-on) maturing in April 2026 and a B2 senior secured rating to the €120 million revolving credit facility (RCF) maturing in June 2023.

The outlook is negative.

The planned €240 million add-on to the term loan will be used along with €32 million of cash on balance to finance acquisitions and pay transaction fees.

Today's rating action reflects the following interrelated drivers:

- High Moody's adjusted leverage of 6.5x expected for year-end 2020

- Relevant strategic rationale of strengthening existing market positioning and increasing scale in a market subject to continuous price pressure

- Good operating performance illustrated by good Moody's-adjusted EBITDA margin historically which should translate in positive free cash flow (FCF) going forward

- Management indication that the framework of the new triennial agreement that regulates reimbursements in France is not expected to change materially following current negotiations

As indicated by the negative outlook, the ratings are weakly positioned and include Moody's expectations that the company will successfully integrate the significant amount of acquisitions announced over the last 12 months and realize operating performance and leverage improvements. This should translate into a Moody's-adjusted debt/EBITDA improving towards 6.0x by 2021 and positive FCF going forward.

RATINGS RATIONALE

The B2 CFR of Biogroup-LCD reflects (1) the company's N°1 position in the French testing routine market and its network density in the regions where the company operates which allow for economies of scale and procurement efficiencies which are hard to replicate by the fragmented regional competition; (2) barriers to entry into the French laboratory market including strict accreditation requirements and complex logistics; (3) defensive nature of the diagnostic testing market and favourable trends including ageing population and rise of prevention and early detection supporting volume growth of laboratory testing in France; (4) the company's high profitability, which should support positive FCF generation going forward; and (5) the track record of successful integration of acquisition targets in regional clusters demonstrated to date.

Conversely, the B2 CFR is constrained by (1) the company's geographic concentration in France which leaves the company exposed to regulatory changes in this country; (2) pressure to decrease healthcare spending and reduce laboratory tariffs, partially mitigated by a national tariff agreement which improves the stability and predictability of tariffs until the end of 2019; (3) a high Moody's-adjusted (gross) leverage as a result of a partially debt funded aggressive acquisition strategy; (4) some execution risks associated with achieving targeted cost savings from recently announced acquisitions, although the majority of the cost savings are secured at the time of acquisition; (5) the fact that Biogroup-LCD's success is dependent on its founder and CEO, Stéphane Eimer, which means, that the company is exposed to a key man risk; and; (6) the presence of a subordinated bond, located outside of the restricted group and maturing after the Term Loan B and not included in our leverage calculation. The existence of this instrument could reduce the ability of Biogroup-LCD to delever if cash payments are made to entities outside of the restricted group, although any such payments would be subject to a restricted payment test included in the credit agreement that requires compliance with an equal to or less than 3.0x net total Debt/EBITDA (proforma for such payments) against a leverage of 6.2x at closing of the transaction, and creates an incremental refinancing risk over time.

RATING OUTLOOK

The negative outlook reflects the fact that Moody's-adjusted leverage is expected to remain elevated in the next 12 months. The negative outlook also reflects the risks associated with the expected deleveraging and positive free cash flow generation going forward given the aggressive debt-funded acquisition strategy of the company.

WHAT COULD CHANGE THE RATINGS UP/DOWN

Given the negative outlook, upward rating pressure is unlikely in the near term. However, positive pressure could arise over time if:

- the company's Moody's-adjusted debt/EBITDA ratio falls sustainably towards 5.0x while achieving profitable growth and maintaining a solid liquidity profile including positive FCF;

- the company refinances the subordinated bond sitting at Laboratoire Eimer Selas level.

Biogroup-LCD is weakly positioned in the B2 rating category and negative pressure could arise if:

- the company's Moody's adjusted debt/EBITDA ratio would remain above 6.0x on a sustained basis, including as a result of further debt funded acquisitions;

- its FCF would be negative for a prolonged period;

- its liquidity profile were to weaken; or

- its profitability were to deteriorate due to difficulties integrating acquisitions, competitive, regulatory and/or pricing pressure.

LIQUIDITY

Liquidity is good supported by (1) €100 million of cash on balance at end-June 2019, (2) undrawn RCF of €120 million after the transaction, (3) expected positive FCF in the next 12-18 months and (4) long-dated maturities with the RCF maturing in June 2023 and the 1st lien term loan in April 2026 and the 2nd lien term loan in November 2026.

The term loan is covenant-lite, whereas the RCF is subject to a springing covenant (flat total net leverage covenant at 7.0x) tested quarterly when drawings exceed 35% of the total commitments.

ESG CONSIDERATIONS

Moody's considers that Biogroup-LCD has an inherent exposure to social risks given the highly regulated nature of the healthcare industry and the sensitivity to social pressure related to affordability of and access to health services. Biogroup-LCD is exposed to regulation and reimbursement schemes in France which are important drivers of its credit profile. Ageing population support long-term demand for diagnostic testing services, supporting Biogroup-LCD's credit profile. At the same time, rising demand for healthcare services pressure public authorities' budget which reimburse most of them and hence translates into regular reimbursement cuts.

Moody's considers that governance risks for Biogroup-LCD would be any potential failure in internal control which would result in a loss of accreditation of reputational damage and as a result could harm its credit profile. Because of Biogroup-LCD's good operating track record, there is no evidence of weak internal control to date. Biogroup-LCD has an aggressive financial strategy characterized by high financial leverage, shareholder friendly policies such as the pursuit of debt-financed acquisitions. Moreover, Moody's believes that the strong growth of Biogroup-LCD has been led mainly by Stéphane Eimer, the company's founder and CEO. This exposes Biogroup-LCD to a key man risk. The risk is only to some extent mitigated by (i) the alignment of interest between the founder, which personal net worth is tied to the company, and creditors; (ii) by the presence of a supervisory board which oversees management's decision; (iii) the fact that the majority of lab operations are run locally and do not require material involvement from top management and (iv) the presence of CDPQ as a long term partner and as a member of the supervisory board. Creditors also benefit from restrictions in corporate activity provided for in the senior debt financial documentation. However, Moody's notes that the supervisory board does not comprise any independent member.

STRUCTURAL CONSIDERATIONS

The B2-PD PDR, in line with the CFR, reflects Moody's assumption of a 50% family recovery rate typical for bank debt structures with a limited or loose set of financial covenants. The first lien term loan and the RCF have a pari passu ranking in the capital structure and benefit from upstream guarantees from material subsidiaries of the group representing at least 80% of the group's EBITDA. The security package includes shares, intercompany loans and bank accounts.

The first lien term loan and the RCF rank ahead of the €187 million second lien in the waterfall analysis but they do not benefit from a notch uplift from the CFR reflecting the limited cushion provided by the €187 million second lien term loan.

PRINCIPAL METHODOLOGY

The principal methodology used in these ratings was Business and Consumer Service Industry published in October 2016. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

COMPANY PROFILE

CAB (Biogroup-LCD), headquartered in Wissembourg, France, is one of the largest clinical laboratory testing network in France. Pro forma for announced acquisitions, the company will become N°1 player in the routine testing business in France in terms of revenue. The company, with around 620 laboratories (pro forma for announced acquisitions), offers mainly routine and to a smaller extent specialty tests. Biogroup-LCD is able to insource the majority of its specialty tests to its specialised technical center in the Ile-de France region where tests are processed within one day.

Biogroup-LCD is owned by its founder, Stéphane Eimer, who controls the company. Minority shareholders include Caisse de Depot et Placement du Quebec (CDPQ), members of the management team and partner biologists. CDPQ is an institutional investor managing mainly pensions and insurance plans in Quebec and is a long-term partner of Biogroup-LCD. Mr Stéphane Eimer is the founder, the majority owner and the Chief Executive Officer (CEO)/Chairman of the company and has been managing the company since its creation in 1998. The Chief Financial Officer of the group and deputy CEO is Prosper Attias who joined Biogroup-LCD in 2003.

REGULATORY DISCLOSURES

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.

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

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
Analyst
Financial Institutions 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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