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Rating Action:

Moody's assigns B2 to Synlab's term loan

03 Nov 2017

London, 03 November 2017 -- Moody's Investors Service has today assigned a B2 rating to the EUR300 million senior secured term loan due 2022 borrowed by Synlab Bondco PLC, a subsidiary of Synlab Unsecured Bondco PLC (Synlab), the largest clinical laboratory services provider in Europe. Synlab's other ratings remain unchanged, namely, the B2 corporate family rating, the B2-PD probability of default rating, the B2 ratings of the EUR1,840 million senior secured notes due 2022 issued by Synlab Bondco PLC, and the Caa1 rating of the EUR375 million senior unsecured notes due 2023 issued by Synlab Unsecured Bondco PLC. The rating outlook on all ratings is stable.

Synlab Bondco PLC borrowed the EUR300 senior secured term loan in September 2017 to repay the EUR125 million drawn on the EUR250 million super senior secured revolving credit facility (unrated) due 2021 and finance future acquisitions.

Today's rating action reflects the following interrelated drivers:

- The new EUR300 million senior secured term loan ranks pari passu with other B2-rated senior secured notes of the company;

- Synlab's leverage, as measured by Moody's-adjusted debt/EBITDA, has increased to 6.8x (pro forma for the completed acquisitions and the new term loan) from 6.4x as of 30 June 2017 because the company has increased its gross debt;

- Moody's nevertheless expects that Synlab's leverage will trend towards 6.0x within the next 12-18 months as the company spends available cash on EBITDA-accretive acquisitions, derives synergies from completed acquisitions, and grows revenue organically in the low mid-single-digit percent range.

RATINGS RATIONALE

"Synlab's highly acquisitive strategy has kept its leverage elevated, but the company has a good track record of acquisitions that deliver synergies, a leading scale in terms of revenue that helps in negotiations with regent producers, and good diversification across various regulatory regimes in Europe that helps decrease relative risk from regulatory changes and tariff cuts", says Andrey Bekasov, AVP and Moody's lead analyst for Synlab.

"Pro forma for expected acquisitions, assuming a 7.0x EV/EBITDA multiple, Synlab's leverage is lower at 6.3x compared to 6.8x at closing of the term loan. We expect further deleveraging towards 6.0x based on modest organic growth and continued synergies from acquisitions", adds Andrey.

Synlab's B2 corporate family rating (CFR) reflects the company's: (1) leading position in the clinical laboratory services market in Europe in terms of revenue; (2) good geographic diversification across various regulatory regimes, which limits its exposure to adverse changes in one particular regime; (3) good underlying fundamental trends that support demand for clinical laboratory services.

Conversely, the rating reflects the company's: (1) high leverage, as measured by Moody's-adjusted debt/EBITDA, of around 6.8x based on the results for 12 months ended 30 June 2017 (LTM June 2017) pro forma for the completed acquisitions; (2) aggressive acquisition strategy, which may slow down deleveraging; and (3) the remaining risk of potential tariff cuts in key markets, which drives the need to grow externally to achieve economies of scale.

RATING OUTLOOK

The stable outlook reflects Moody's expectation that Synlab's leverage, as measured by Moody's-adjusted debt/EBITDA, will trend towards 6.0x within the next 12-18 months.

FACTORS THAT COULD LEAD TO AN UPGRADE

- Synlab's leverage, as measured by Moody's-adjusted debt/EBITDA, were to improve and remain below 5.5x sustainably

- the company were to continue to generate positive free cash flow (FCF) and improve its profitability

FACTORS THAT COULD LEAD TO A DOWNGRADE

- Synlab's leverage, as measured by Moody's-adjusted debt/EBITDA, were to exceed 6.5x for a prolonged period

- the company's liquidity profile were to weaken

- its profitability were to significantly deteriorate because of competitive or pricing pressures

LIQUIDITY

Synlab's liquidity is adequate and supported by the company's long-dated debt maturities, cash of around EUR288 million (as of 30 June 2017, pro forma for completed acquisitions afterward and new EUR300 million term loan), expected FCF of around EUR100 million in 2018 (after adjusted capital spending of around EUR100 million, but before acquisitions) and an undrawn EUR250 million super senior secured revolving credit facility (RCF). However, the company will likely use most of its cash, all of its FCF and most of the RCF for further acquisitions. Synlab has one widely set net leverage covenant on the RCF that acts only as a draw-stop and tested only when the RCF is drawn by at least 35% (a "springing" covenant). The company would comply with this covenant if it were tested.

STRUCTURAL CONSIDERATIONS

The B2 ratings of the EUR1,840 million senior secured notes and the EUR300 million term loan in line with the B2 CFR and the B2-PD probability of default rating reflect a 50% assumed corporate family recovery rate, which is typical for debt structures with a mixture of notes and bank debt. The Caa1 rating of the EUR375 million senior unsecured notes reflects their subordination to the senior secured debts and to the EUR250 million super senior secured RCF.

RATING 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.

CORPORATE PROFILE

Synlab, headquartered in Munich, Germany, is the largest clinical laboratory services provider in Europe, with pro forma revenue of around EUR1.7 billion based on LTM June 2017. The company operates in 27 countries in Europe and in eight countries outside of Europe, with 531 laboratories and over 19,000 employees. The company is majority owned by funds advised by Cinven.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt 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.

Andrey Bekasov
Asst Vice President - Analyst
Corporate Finance Group
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Richard Etheridge
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Releasing Office:
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

No Related Data.
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