EUR500 million of long-term debt instruments affected
Paris, January 11, 2011 -- Moody's Investors Service has today assigned a provisional (P)B2
Corporate Family Rating (CFR) and a provisional (P)B2 Probability of Default
Rating (PDR) to Labco S.A.S. ("Labco"
or "the company"). Moody's has also assigned
a provisional (P)B3 rating to the company's proposed EUR500 million
senior secured notes. The outlook is stable. This is the
first time that Moody's has rated Labco.
Moody's issues provisional ratings in advance of the final sale of securities
and these reflect Moody's credit opinion regarding the transaction only.
Upon closing of the refinancing and a conclusive review of the final documentation,
Moody's will endeavor to assign definitive ratings to Labco. A
definitive rating may differ from a provisional rating. The ratings
assigned to Labco assume a successful refinancing of the company's current
financing package.
RATINGS RATIONALE
Although the company's high leverage constrains the (P)B2 CFR assigned
to Labco, the CFR reflects (i) its position as one of Europe's
largest players in the highly fragmented European clinical laboratory
services market and more particularly its leading positions in France
and Iberia; (ii) the company's good profitability and business
model which allows for the benefits of scale and derivation of synergies;
(iii) relatively favourable growth prospects in terms of volume;
and (iv) resilience to economic downturns.
The positives are, in addition to high leverage, balanced
by (i) an overall limited size; (ii) regulatory risks, in particular
relating to potential tariff-cuts as governments seek to contain
healthcare expenditures; and (iii) a complex organisational structure
in France.
The stable outlook reflects (i) a business-profile which,
despite the risk of price cuts, demonstrates relatively good visibility;
and (ii) Moody's expectation of continued positive free cash flow
generation.
Through its solid positioning as one of Europe's largest private
clinical laboratory operators, Labco has established a regional
business model that allows it to reap benefits of scale by acting as a
consolidator and exploit synergy-potential particularly present
in fragmented markets such as France and Italy. The company's
strong positioning in France has allowed for the development of regional
platforms that have enhanced profit margins and contributed to an overall
good profitability-profile. Labco's markets are expected
to benefit from favourable trends in demographics and the diagnostics
sector, both of which should continue underpinning volume growth
going forward as an aging population may require more tests and patients
are treated at an earlier stage.
In most countries where Labco is present, the industry is subject
to regulatory constraints, in terms of issues directly affecting
tariffs (such as reimbursement and overall pricing-pressures),
but also through the legal framework in which companies have to operate.
In particular, the regulatory environment in France has led to Labco
establishing a complex structure to deal with the imposed constraints
so that it can maintain economic control over its subsidiaries allowing
it to consolidate the French operations and upstream cash flows despite
not being in control of the majority of voting rights. In this
context, Moody's notes that the company's ability to
pool or dividend-up cash flow generated by its French laboratories
could be impacted in case of regulatory challenges or changes in the regulatory
framework requiring modifications of the company's French structure.
Moody's recognises, however, that the industry may be
moving more towards liberalisation, which at some point could alleviate
the regulatory constraints related to ownership. Moody's
notes that Labco did not fully consolidate its French franchise until
mid 2008 and that the statutory accounts of the company therefore offer
only a limited track-record of the company's historical performance.
While Moody's views the visibility of patient-flow as being
relatively high in Europe, the expected continued pressure on healthcare
reforms throughout the continent represents a downside risk as tariffs
may come under further pressure, although Moody's notes that
clinical laboratory services only represent a small share of overall healthcare-costs.
The agency also views the company's significant exposure to the
French market -- which benefits from overall higher tariffs
-- as a risk factor, because changes to the regulatory
environment could significantly impact the company's performance.
Moody's considers the expected pricing pressure to be mitigated
by continued volume-growth.
An important element to Labco's business model has been to undertake
bolt-on acquisitions that enable it to derive important synergies,
because it can then implement regional technical platforms that provide
clinical diagnostics for several laboratories at the same time.
While acknowledging that Labco has successfully implemented this model
in the past, Moody's nevertheless considers that Labco's
acquisitive nature represents a potential risk-factor, if
the company faces unexpected obstacles in the process of integration.
Moody's would expect Labco's leverage to remain high over
the intermediate term as the company is expected to continue to invest
both its free cash flow and proceeds from its EUR125 million revolving
credit facility into small accretive acquisitions in order to drive company
growth. An eventual improvement in credit metrics will therefore
most likely depend on the company's ability to derive expected synergies,
allowing cash flows to increase. The company's Debt/EBITDA,
as per Moody's definition, is expected to slightly decline
to around 5.5x over the next two years, from around 6.0x.
Labco's liquidity profile is expected to remain adequate after the
refinancing as it will continue generating free cash flow and has no upcoming
debt maturities. Moreover, Labco's solid cash balance
of approximately EUR90 million as at 30 September 2010 and its undrawn
revolver should provide a further cushion, if necessary.
Moody's nevertheless notes that Labco's headroom under its
financial covenants is restrictive. While deviations in operating
performance may lead to a further tightening of covenant headroom,
Moody's takes comfort from the company's flexibility to adjust
its acquisition activity, and thus limit increases in net debt levels,
if needed.
The (P)B3 rating (LGD 4, 58%) assigned to the EUR500 million
senior secured notes is one notch below the (P)B2 CFR. The rating
of the notes reflects its ranking behind the sizeable EUR125 million super
senior revolving credit facility, which is signed and guaranteed
by Labco S.A.S. (borrowers under the facility are
some of Labco's subsidiaries). While both instruments benefit
from the same guarantee (not less than 70% of consolidated EBITDA)
and security package, the latter consisting of pledges over shares
of certain group entities and certain intercompany loans, the revolving
credit facility will benefit from an intercreditor agreement with enforcement
action relating to the guarantees or security which result in the RCF
being ahead of the notes in the defined Moody's waterfall.
As seen in other transactions, Moody's notes that --
depending on the insolvency regime -- certain limitations exist regarding
the enforceability of the guarantees and the security interest,
e.g. in France, where guarantees by French guarantors
are limited to an amount equal to the proceeds from the offering of the
notes that the issuer has applied for the direct or indirect benefit of
French guarantors. Further limitations include for example restrictions
on the ownership of French laboratory companies, which might limit
the full enforceability of the corresponding share pledges.
Rating assignments:
Labco S.A.S.:
... Corporate Family Rating: (P) B2
... Probability of Default Rating: (P) B2
... Senior Secured Regular Bond/Debenture:
(P) B3 (LGD 4 - 58%)
An upgrade of the corporate family rating to B1 could be considered if
the company's leverage ratios improve, as exemplified by a
ratio of Debt/EBITDA improving to around 5x. Negative rating pressure
could arise if (i) the leverage remains above 6.0x for an extended
period of time, (ii) the company's liquidity profile or leeway
under financial covenants weakens or (iii) if profitability weakens,
e.g. as a result of changes in regulation or tariff cuts.
The principal methodologies used in rating Labco were "Global Business
and Consumer Service Industry" published in October 2010 and "Loss Given
Default for Speculative-Grade Non-Financial Companies in
the U.S., Canada and EMEA" published in June 2009.
Other methodologies and factors that may have been considered in the process
of rating this issuer can also be found on Moody's website.
Labco is a pan-European clinical laboratory services provider.
The company operates more than 230 laboratories across six different European
countries and mainly performs routine-tests. The company
generated revenue of EUR424 million in 2009.
REGULATORY DISCLOSURES
Information sources used to prepare the credit rating are the following:
parties involved in the ratings, parties not involved in the ratings,
public information, and confidential and proprietary Moody's
Investors Service information.
Moody's Investors Service considers the quality of information available
on the issuer or obligation satisfactory for the purposes of assigning
a credit rating.
The rating has been disclosed to the rated entity or its designated agents
and issued with no amendment resulting from that disclosure.
Moody's Investors Service may have provided Ancillary or Other Permissible
Service(s) to the rated entity or its related third parties within the
three years preceding the Credit Rating Action. Please see the
ratings disclosure page www.moodys.com/disclosures on our
website for further information.
Moody's adopts all necessary measures so that the information it uses
in assigning a credit rating is of sufficient quality and from sources
Moody's considers to be reliable including, when appropriate,
independent third-party sources. However, Moody's
is not an auditor and cannot in every instance independently verify or
validate information received in the rating process.
Please see ratings tab on the issuer/entity page on Moodys.com
for the last rating action and the rating history.
The date on which some Credit Ratings were first released goes back to
a time before Moody's Investors Service's Credit Ratings were fully digitized
and accurate data may not be available. Consequently, Moody's
Investors Service provides a date that it believes is the most reliable
and accurate based on the information that is available to it.
Please see the ratings disclosure page on our website www.moodys.com
for further information.
Please see the Credit Policy page on Moodys.com for the methodologies
used in determining ratings, further information on the meaning
of each rating category and the definition of default and recovery.
Paris
Marie Fischer-Sabatie
Vice President - Senior Analyst
Corporate Finance Group
Moody's France SAS
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
Paris
Eric de Bodard
MD - Corporate Finance
Corporate Finance Group
Moody's France SAS
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SUBSCRIBERS: 44 20 7772 5454
Moody's France SAS
96 Boulevard Haussmann
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Moody's assigns P(B2) CFR to Labco; outlook stable
