Hong Kong, April 14, 2021 -- Moody's Investors Service has downgraded the corporate family rating (CFR)
and senior unsecured rating of Yestar Healthcare Holdings Company Limited
to Caa1 from B3.
The outlook on the ratings remains negative.
In its 2020 results announcement dated 7 April, Yestar indicated
that there are significant uncertainties as to whether the company can
continue as a going concern. The company's ability to continue
as a going concern will depend on successful negotiation with lenders
and bond holders on the due dates of maturing debts and with non-controlling
shareholders on the due dates of its payables, as well as obtaining
additional financing facilities within the next 12 months.
In addition, the company has appointed a financial advisor regarding
the upcoming maturity of its USD200 million senior notes due on 15 September
2021.
"The downgrade to Caa1 and negative outlook reflect Yestar's higher
probability of default given its increased liquidity risk, with
a USD200 million bond due in September 2021," says Gerwin Ho,
a Moody's Vice President and Senior Credit Officer.
RATINGS RATIONALE
Yestar's Caa1 corporate family rating is constrained by its modest size,
high supplier concentration, large repayment and working capital
needs over the next 12 months and weak financial management. These
credit challenges offset its solid position in the distribution of medical
consumable products in China and strong and sustained partnership with
leading global companies, including Roche Holding AG (Aa3 positive)
and FUJIFILM Holdings Corporation (A2 stable); the latter held a
9.8% stake in Yestar as of 30 June 2020.
Yestar's liquidity is weak. As of 31 December 2020, the company's
cash reserves -- including restricted cash -- of RMB587 million
were insufficient to cover its short-term debt, which includes
a USD200 million bond due in September 2021.
Moody's expects Yestar's working capital needs to rise with the growth
of its IVD distribution and service provision business, given the
longer payment terms associated with this business. The company's
medical business, which includes the higher margin IVD business,
accounted for 92% of total revenue in 2020.
At the same time, Moody's expects Yestar's short-term debt
to increase to fund its higher working capital needs and payments associated
with previous acquisitions.
Moody's forecasts Yestar's revenue will grow about 9% over the
next 12-18 months from the level in 2020. The rise reflects
the continued growth in demand for medical consumable products in China
supported by the company's increased market share and growing geographical
coverage, and partially offsetting weakening demand in its non-medical
businesses.
Moody's expects Yestar's leverage, as measured by adjusted debt/EBITDA,
will stay at about 3.7x over the next 12-18 months from
about 4.0x in 2020 as the increase in EBITDA resulting from a revenue
recovery outpaces the rise in debt to fund its business growth and acquisition-related
payments.
From a governance perspective, management had also adopted an acquisitive
growth strategy and exhibited weak financial management in terms of addressing
its near-term maturities.
Yestar's senior unsecured bond rating is not affected by subordination
to claims at the operating company level. This is because creditors
at the holding company benefit from cash flow generation across a number
of operating subsidiaries, mitigating structural subordination risk.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
The negative outlook reflects the high uncertainty over Yestar's
ability to arrange funding on a timely basis to meet its near-term
refinancing needs.
The outlook on Yestar's ratings could return to stable if the company
executes its refinancing plan and improves its liquidity position and
capital structure.
Yestar's ratings could be further downgraded if it fails to meet
its payment obligations.
The principal methodology used in these ratings was Distribution &
Supply Chain Services Industry published in June 2018 and available at
https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1121974.
Alternatively, please see the Rating Methodologies page on www.moodys.com
for a copy of this methodology.
Headquartered in Shanghai and listed on the Hong Kong Stock Exchange since
October 2013, Yestar Healthcare Holdings Company Limited is a distributor
of Roche Holding AG's (Aa3 positive) diagnostics products in China and
is also a distributor of FUJIFILM Holdings Corporation's (A2 stable) film
products in the country.
REGULATORY DISCLOSURES
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Gerwin Ho
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service Hong Kong Ltd.
24/F One Pacific Place
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Hong Kong
China (Hong Kong S.A.R.)
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Clement Cheuk Yiu Wong
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077
Releasing Office:
Moody's Investors Service Hong Kong Ltd.
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JOURNALISTS: 852 3758 1350
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