Johannesburg, 22 Jan 2014 — Global Credit Ratings has today affirmed the long term national scale and affirmed the short term national scale issuer ratings assigned to Netcare Limited of A(ZA) and A1(ZA) respectively; with the ratings retained on Rating Watch.
For the purposes of this rating, GCR has focused on the extent to which Netcare’s local Rand-denominated cash flows cover Rand-denominated borrowings.
Global Credit Ratings has accorded the above credit rating(s) on Netcare Limited based on the following key criteria:
Netcare’s entrenched position as the largest domestic emergency service, private hospital and primary care network is underpinned by an extensive array of healthcare facilities, modern equipment and procedures, as well as linkages with highly skilled medical professionals. Despite the challenging operating environment, these competitive advantages have seen the group’s South African operations maintain steady top line performance, with revenue increasing by 6% to a new high of R15.5bn in F13. Improved procurement and enhanced operational efficiencies have sustained robust margins, and should ensure consistent profitability going forward. Coupled with a steady improvement in patient days and higher utilisation of the extensive local bed capacity, domestic operations reported a 17.7% operating margin in F13 (F12: 16.9%), supporting a 12% increase in operating profit to R2.8bn. Net income similarly went up by 17% to register at a high of R1.9bn.
Cash generation remains robust, with operating cash flows having risen by 17% to R2.1bn in F13, on the back of stronger earnings. Accordingly, discretionary cash flows equated to a higher 50% of net debt in F13 (F12: 34%). Internally generated cash flows will be used to fund the bulk of the group’s domestic operating and capex requirements in the medium term, a factor that should contain debt to comfortable levels. Borrowings retreated to R4bn at FYE13, following the redemption of maturing obligations amounting to R392m. Gearing measures were therefore reported at review period lows (with net debt to equity at 39%, from 52% previously), while net interest cover more than doubled to 28x. Netcare plans to pay down a fair portion of its maturing domestic liabilities during F14, notably enhancing credit protection measures.
Although the UK operations and debt funding have no recourse to the South African business, a fair amount of uncertainty still hangs over the group with respect to the refinancing of GHG PropCo 1’s £1.5bn debt, which originally had an October 2013 expiry. The maturity has been extended to April 2014, giving stakeholders room to reach a consensus on possible refinancing. GHG PropCo 1’s debt is fully performing, with no covenant breaches reported to date. It also has no recourse to the group’s operating entity, BMI OpCo or the secondary property business, GHG PropCo 2. Given the uncertainty in terms of the timing and outcome of efforts to restructure the debt, and as the group could suffer reputational damage in the event of a default, the rating has been maintained on Rating Watch. GCR will therefore review the rating by 30 June 2014.
Key to any positive rating movement is the successful refinancing of GHG Propco 1 debt, which would enable management to focus on improving the financial performance of its offshore operations. Upward rating migration could result from the attainment of sound revenue growth (underpinned by robust volumes) despite the constrained macroeconomic environment, and the maintenance of the current strict cost containment regimen, translating to robust medium term profitability and consistently robust credit protection metrics. However, materially weaker operating performance, or a significant deterioration in Netcare’s credit profile, due to, inter alia; subdued economic growth, adverse regulatory changes or unanticipated operational constraints would warrant negative rating action.
|NATIONAL SCALE RATINGS HISTORY|
|Initial rating (Jan/2001)|
|Long term: A-(ZA); Short term: A1-(ZA)|
|Last rating (Jan/2013)|
|Long term: A(ZA); Short term: A1(ZA)|
|Rating watch: Yes|
|+27 11 784 1771|
|Sector Head: Corporates|
|+27 11 784 1771|
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SALIENT FEATURES OF ACCORDED RATINGS
GCR affirms that a.) no part of the rating was influenced by any other business activities of the credit rating agency; b.) the rating was based solely on the merits of the rated entity, security or financial instrument being rated; c.) such rating was an independent evaluation of the risks and merits of the rated entity, security or financial instrument; and d.) the validity of the rating is for a maximum of 12 months, or earlier as indicated by the applicable credit rating document.
Netcare Limited participated in the rating process via face-to-face management meetings, teleconferences and other written correspondence. Furthermore, the quality of information received was considered adequate and has been independently verified where possible.
The credit rating/s has been disclosed to Netcare Limited with no contestation of the rating.
The information received from Netcare Limited and other reliable third parties to accord the credit rating included the 2013 audited annual financial statements (plus four years of comparative numbers), corporate governance and enterprise risk framework, industry comparative data and regulatory framework, budgeted financials for the year 2014 (SA operations only), as well as a breakdown of facilities available and related counterparties. In addition, information specific to the rated entity and/or industry was also received.
The ratings above were solicited by, or on behalf of, the rated client, and therefore, GCR has been compensated for the provision of the ratings.