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Rating Action:

Moody's changes Cerba's outlook to stable from negative

07 Dec 2020

Frankfurt am Main, December 07, 2020 -- Moody's Investors Service ("Moody's") has today affirmed Constantin Investissement 3 S.A.S.' (Cerba or the company) B2 corporate family rating (CFR), its B2-PD probability of default rating and its Caa1 instrument rating to the senior unsecured notes. Concurrently Moody's has affirmed the B1 instruments ratings to the senior secured revolving credit facility and senior secured term loan B, all issued by Constantin Investissement 4 S.A.S.. The outlook on both entities was changed to stable from negative.

Full details of the rating actions for the affected entities can be found at the end of this press release.

RATINGS RATIONALE

Moody's has stabilized the outlook on Cerba on the back of the strong operating performance to date as COVID tests more than offset core volume (i.e. non COVID tests) disruptions linked to lockdown measures. Moody's positively notes that core volumes have strongly recovered from the trough in April/May 2020 and are now back at pre-pandemic level. The Q3 results showed strong top line growth and margin improvement. As a result, credit metrics including Moody's adjusted leverage have improved during the period. The ratings incorporate the expectation of further gradual leverage improvements over the next quarters.

Cerba's liquidity position is good thanks to a high cash balance and large availability under revolving credit facility at end of September as well as expectation of positive free cash flow generation in the next quarters. Moody's positively notes that Cerba has generated around €60 million of Moody's adjusted free cash flow for the year to date September 2020 period, up from around €20 million for the same period last year.

Moody's expects the strong uptick in COVID testing performed by the sector, including Cerba, to continue through the end of 2020 and into 2021, even for some time after a potential vaccine has been approved. Moody's forecasts that COVID testing activities will continue to more than offset any potential declines in the sector's core testing business. In the past months and especially during the mid-March to mid-May period, decreased patients' visits to doctors offices, the postponement of non-urgent surgeries and staffing constraints drove core tests volume to decrease with drops more severe in countries with stricter lockdowns. Volume for routine tests were more impacted than specialty and hospital outsourcing services.

Moody's believes that uncertainty remains high especially regarding the future volume and price of PCR tests as well as potential future disruption on core volume as long as pandemic persists.

Moody's views this additional boost from COVID tests as temporary since needs for PCR tests will likely decline as vaccines become widely available, by mid-2021 according to Moody's current forecast. The volume of anti-body/serology tests has been relatively limited so far, this might change next year as the need to test the presence of antibodies might increase when a vaccine gets rolled out.

Financial policy will be a key rating driver for the ratings in the next 12-18 months. Cerba has put M&A on hold during the first months of the pandemic but Moody's expects the company to resume M&A activity as the environment remains fragmented and because M&A has been a key pillar of its growth strategy historically. Business rationale, acquisition multiple and funding will be key drivers of the ratings. Active debt-funded M&A activity drove leverage increase in the past and high leverage level was a key rating constrain pre-pandemic. M&A activity also generated restructuring costs which weighted on free cash flow generation in the past. In order to maintain its ratings within the B2 category, Cerba should demonstrate an ability and willingness to maintain its Moody's adjusted debt/EBITDA and Moody's adjusted FCF/debt ratios within its respective triggers set for the B2 -- especially once M&A activity has fully resumed. Debt repayments combined with a strengthening of operating performance and cash generation could gradually support positive rating pressure.

Price pressure has been a credit constrain for the sector in the past. European public authorities have put tariff cuts on hold so far as the sector is seen as instrumental in the day to day fight against the virus. In France for example, the planned 2020 tariff cut has been cancelled and the triennial agreement provides some visibility in terms of tariff movement for the 2021-22 period.

Over the next 12-18 months, Moody's does not expect any significant fundamental changes for the sector. The pandemic has highlighted the vital importance of testing for public health, certainly a positive for the sector in the medium term. Potential structural changes for the sector -- positive or negative -- post COVID are uncertain at this stage. In case of any change, we assume it will be gradual and companies we rate, including Cerba, because of their size and market positioning are certainly relatively better positioned than small players to digest any change.

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) €119 million of cash on balance sheet as of September 2020, (2) a senior secured revolving credit facility (RCF) of €235 million (€75 million was available as of September 2020), (3) positive free cash flow expected for the next quarters and (4) long dated maturities with the senior secured revolving credit facility maturing in October 2023, the senior secured term loan B in April 2024 and the senior unsecured notes in April 2025.

Cerba has a springing covenant, which is tested when the senior secured revolving credit facility is drawn by more than 40% (consolidated senior secured net debt/consolidated pro forma EBITDA flat at 10.9x).

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. We regard the coronavirus outbreak as a social risk under our ESG framework, given the substantial implications for public health and safety. 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. Cerba has an aggressive financial strategy characterised by 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 improve toward 5% on a sustained basis and /or (3) the company's liquidity deteriorates.

LIST OF AFFECTED RATINGS:

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

Affirmations:

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

.... LT Corporate Family Rating, Affirmed B2

....Senior Unsecured Regular Bond/Debenture, Affirmed Caa1

Outlook Actions:

....Outlook, Changed To Stable From Negative

..Issuer: Constantin Investissement 4 S.A.S.

Affirmations:

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

Outlook Actions:

....Outlook, Changed To Stable From Negative

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.

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 https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.

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

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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