Almaviva Developpement -- Moody's assigns a B2 rating to Almaviva; outlook stable

Rating Action: Moody's assigns a B2 rating to Almaviva; outlook stableGlobal Credit Research - 18 Mar 2021Paris, March 18, 2021 -- Moody's Investors Service ("Moody's") has today assigned a corporate family rating (CFR) of B2 and a probability of default rating (PDR) of B2-PD to Almaviva Developpement (Almaviva or the company). Concurrently, Moody's has assigned a B2 rating to the EUR290 million senior secured term loan B due 2028 and to the EUR80 million senior secured revolving credit facility due 2027 raised by Almaviva. The outlook is stable.RATINGS RATIONALEThe B2 CFR assigned to Almaviva is supported by (i) the company's leading position in the French private hospital sector (the number four private operator in France) with long-standing sector expertise and significant presence in affluent areas with strong demographic needs; (ii) a track record of solid organic growth driven by the high quality of the facilities and ongoing recruitment of practitioners, which Moody's believes will continue to attract patients; (iii) Almaviva's overall high degree of visibility in terms of future operating performance supported by social considerations and more particularly favourable demographics and the role of the French National Health System (Social Security) as the payor; (iv) the overall high barriers to entry resulting from the need to obtain necessary authorizations and attract qualified personnel; (iv) adequate liquidity and positive free cash flow generation.Conversely, the B2 rating is constrained by (i) the company's high leverage, measured by Moody's-adjusted (gross) debt/EBITDA, estimated at 5.6x as of end December 2020 and proforma the acquisitions concluded in December 2020, (ii) the company's high exposure to a highly regulated sector with a highly labour intensive nature (personnel costs represented 42% of 2019 revenue); (iii) and a certain degree of event risk as Moody's expects Almaviva will continue to be active in the consolidation of the French private hospital market.Moody's adjusts for capitalized operating leases using a 4x multiple. However, the agency believes that the company's leverage could be well above the 5.6x that it estimates if the agency were to use the net present value of future operating lease commitments, given the long tenor of the company's leases.Moody's expects that Almaviva will gradually deleverage in the next 12-18 months bringing Moody's adjusted leverage below 5.0x by 2022. Almaviva's EBITDA growth will be driven by topline growth and by the ongoing integration and ramp-up of facilities acquired to date. Almaviva's high quality facilities and agile recruitment approach of practitioners is another driver of volume growth, which in turn drive revenue growth. Moody's also expects Almaviva to offset ongoing inflationary pressure on costs through cost efficiencies.LIQUIDITYMoody's expects Almaviva's liquidity profile to be good over the next 12-18 months. The company's liquidity, pro forma the transaction, is supported by cash at closing of around EUR30 million net of the cash advances received and to be reimbursed as part of the French government support measures; expected positive free cash flow of between EUR15 -- EUR20 million; and access to a fully undrawn EUR80 million revolving credit facility (RCF). Moody's expects Almaviva's liquidity sources to fully cover the company's annual maintenance capex of around EUR18 million and partly finance the around EUR10 million growth capex expected in the next two years. Growth capex is mainly related to real estate developments including extensions and refurbishments and to IT projects. Moody's expects growth capex to normalize to around EUR3 million per annum after 2022. The next debt maturity will occur in 2028 when the new EUR290 million Term Loan expires.STRUCTURAL CONSIDERATIONSThe B2 rating assigned to the EUR290 million senior secured term loan B and the EUR80 million senior secured RCF reflects their pari passu ranking in the capital structure and the upstream guarantees from material subsidiaries of the group representing 80% of EBITDA. 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 loose set of financial covenants.There is a shareholder loan between Almaviva and its holding company which currently complies with the requirements for equity treatment under Moody's cross-sector rating methodology "Hybrid Equity Credit". However, those requirements will no longer be met if the shareholder loan is still outstanding following an IPO (not considered at this stage) due to the release of certain provisions.OUTLOOKThe stable outlook reflects Moody's expectation that Almaviva will continue to grow, mainly through bolt-on acquisitions, while maintaining Moody's-adjusted (gross) debt/EBITDA below 5.5x. The stable outlook also reflects Moody's expectation that the company will continue to generate positive free cash flow and will maintain a good liquidity profile.FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGSPositive pressure could arise if: i) the company's Moody's-adjusted (gross) debt/EBITDA ratio falls sustainably below 4.5x meaning that the company further grows its earnings and successfully executes its strategy, including the smooth integration of bolt-on acquisitions; or ii) if Moody's-adjusted free cash flow to debt consistently exceeds 5%, and iii) there is no adverse change in the company's business strategy or financial policy.However, negative pressure could arise if: i) the company's Moody's-adjusted (gross) debt/EBITDA ratio remains above 5.5x on a sustained basis; or ii) profitability were to deteriorate because of competitive, regulatory and pricing pressure; or iii) Moody's-adjusted FCF becomes negative for a prolonged period; iv) or the company's financial policy becomes more aggressive with regards to debt financed acquisitions.PRINCIPAL METHODOLOGYThe principal methodology used in these ratings was Business and Consumer Service Industry published in Ocotber 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.COMPANY PROFILEAlmaviva Developpement (Almaviva) is the fourth largest France-based private hospital group. Almaviva is a regional operator focused on French regions: Ile-de-France (19 facilities) and Provence-Alpes-Côte d'Azur (17 facilities). In 2019, the company generated E438 million revenue.The group's ownership is shared between a fund managed by Antin Infrastructure Partners (majority shareholder), Sagesse Retraite Santé (SRS) which is a family holding through which Yves Journel, who is the founder of DomusVi, is invested in Almaviva, and by the managementand practitioners.REGULATORY DISCLOSURESFor further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. 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