ating Action: Moody's affirms Grifols SA's Ba2 CFR; changes outlook to stable from negative
Global Credit Research - 13 Oct 2015
London, 13 October 2015 -- Moody's Investors Service (Moody's) has today affirmed the Ba2 corporate family rating (CFR) and the Ba2-PD probability of default rating (PDR) of Grifols S.A. (Grifols), a global healthcare company primarily focused on blood plasma-derived products and transfusion medicine. Concurrently, Moody's also affirmed the Ba1 rating of the USD4.5 billion senior secured bank loans and the B1 rating of the unsecured USD1 billion notes issued by Grifols World Wide Operations Ltd. Moody's has changed the outlook to stable from negative.
RATINGS RATIONALE
"The affirmation of Grifols' Ba2 CFR and the change in the outlook to stable from negative reflects the fact that Grifol's performance in 2014 and in first half of 2015 has been in line with Moody's expectations. Based on LTM June 2015's results, Grifols leverage as measured by Moody's Adjusted Gross Debt-to-EBITDA was 4.2x. However, based on Moody's revised forecast, Grifols' leverage will trend toward 3.9x in the next 12-18 months." says Andrey Bekasov, AVP and lead analyst at Moody's.
"Moody's expects mid-single digit organic growth in Bioscience driven by sales of IVIG and Alpha-1 because of marketing efforts in the US and EU and by global sales of albumin particularly in China after the renewal of the import licence. Moody's expects Diagnostics to have low-single digit organic growth mainly driven by demand in Asia. Grifols will likely need to adjust its inventory levels upwards after the introduction of additional production capacity in the US, which will slightly suppress CFO-to-Debt. This will also require expansion of collection centres. However, Moody's expects Grifols to continue generating positive free cash flows also thanks to the lower capex and R&D requirements (not more than 10% of sales) compared to traditional pharmaceutical companies." adds Andrey Bekasov.
As Moody's expected, in the first half of 2015 Grifols' EBITDA has benefitted from the depreciation of the EUR (the reporting currency) versus the USD as earnings in USD (translated in EUR) were gradually "catching up" with mainly USD-denominated debt. Moody's believes Grifols has an adequate natural currency hedge in place by closely matching its debt in USD with cash flows in USD. However, large moves in EUR/USD exchange rate can add volatility to EBITDA.
Grifols' Ba2 corporate family rating (CFR) incorporates (1) Grifols' narrow, albeit improving, diversification, with a high dependence on plasma-derived products and vulnerability to market imbalances and negative pricing movements; (2) our view of the potential high impact -- albeit low probability -- of safety risks relating to product contamination; and finally (3) Grifols' credit metrics, which we expect will remain adequate for the rating in the next 12-18 months.
These negative rating drivers are balanced by (1) Grifols' scale, with a high degree of vertical integration and the solid market position; (2) the barriers to entry to the blood plasma-derived products market including, but not limited to, a high degree of capital-intensity and regulatory constraints in combination with a highly consolidated market that is dominated by three players (Grifols, CSL and Baxalta); (3) favourable market dynamics, with attractive volume growth supported by earlier and enhanced diagnosis of patients; and (4) the generally strong capacity to generate free cash flow.
Grifols' liquidity profile is good. The 2014's refinancing resulted in a lengthening of the new debt maturity profile which is a positive factor for the rating. The term loans will amortize until 2020 and 2021, albeit at a very slow pace, while the revolving credit facility (RCF) of USD300 million will mature in 2019. Grifols retains a solid liquidity position, including EUR788.7 million in cash and cash equivalents and an undrawn USD300 million RCF as of 30 June 2015. The senior secured bank credit facilities contain one financial covenant for leverage with good headroom. Grifols' only medium-term debt maturities include small amortization payments on the term loans.
In 2014, Grifols refinanced its term loans of about USD4.5 billion, including the unsecured bridge facility of USD1.5 billion used to fund the acquisition of the diagnostic division, with new term loans of USD4.5 billion. The new term loans are guaranteed by subsidiaries of the group representing at least 80% of the consolidated assets and consolidated EBITDA and secured on all material assets of the group. Grifols also refinanced its 8.25% USD1.1 billion unsecured notes due 2018 with the new 5.25% USD1.0 billion unsecured notes due 2022. The senior secured instrument ratings are Ba1/LDG3, one notch higher than the corporate family rating, and the unsecured notes are rated B1/LGD6, to reflect their subordination to the term loans.
RATIONALE FOR THE STABLE OUTLOOK
The stable outlook reflects Moody's view that Grifols credit metrics will be within the target range for the rating, and that the pace of deleveraging will be slow. The stable outlook does not incorporate significant capital structure changes from shareholder friendly actions or large debt-financed acquisitions.
WHAT COULD CHANGE THE RATING - UP
An upgrade of the CFR to Ba1 is unlikely in the next 12-18 months, but could be considered if:
Moody's Adjusted Gross Debt-to-EBITDA trends towards 3.0x
CFO-to-Debt improves sustainably above 20%
Stable operating performance continues with share gains in major products
WHAT COULD CHANGE THE RATING - DOWN
Downward pressure could arise if:
Moody's Adjusted Gross Debt-to-EBITDA remains sustainably over 4.0x
CFO-to-Debt falls towards 10%
Moody's Adjusted EBITDA margin notably drops
Liquidity deteriorates significantly
Quality concerns emerge about Grifols' major products
PRINCIPAL METHODOLOGY
The principal methodology used was the Global Medical Product and Device Industry published in October 2012. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.
Grifols S.A. (Grifols), based in Barcelona, Spain, is a global healthcare company primarily focused on blood plasma-derived products for transfusion medicine. Grifols extracts essential proteins from human plasma, the liquid portion that constitutes 50% of the total blood volume, and uses these proteins to produce therapeutic medicines to treat a range of rare, chronic and acute conditions. Grifols also supplies devices, instruments and reagents for clinical diagnostic laboratories. In 2014, Grifols reported revenues of EUR3.35 billion broken down by geography as follows: USA and Canada, 60.9%; EU, 19.8%; and the rest of the world, 15.5%. The company had 13,980 employees and operated subsidiaries in 30 countries as of 31 December 2014. Grifols is listed (also via ADR in the US) on the Madrid Stock Exchange and is part of the IBEX 35 Index.
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 rating action on the support provider and in relation to each particular 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 rating action, and whose ratings may change as a result of this 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
SUBSCRIBERS: 44 20 7772 5454
Mario Santangelo
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 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
SUBSCRIBERS: 44 20 7772 5454
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