Johannesburg, 27 Jun 2014 — Global Credit Ratings has today affirmed the national scale ratings assigned to Netcare Limited of A(ZA) and A1(ZA) in the long term and short term respectively; with the outlook accorded as Stable. For the purposes of this rating, GCR has focused on the extent to which Netcare Limited’s local Rand-denominated cash flows cover Rand-denominated borrowings.
SUMMARY RATING RATIONALE
Global Credit Ratings has accorded the above credit rating(s) to Netcare Limited (“Netcare”) based on the following key criteria:
Netcare’s ratings were placed on Rating Watch in January 2013, pending the refinancing of GHG PropCo 1’s £1.5bn debt facilities, which were originally set to mature in October 2013. However, the maturity of GHG PropCo 1’s debt has been extended three times, with the current extension set to expire in July 2014. Given the large number of parties involved, it is uncertain when a permanent refinancing agreement will be reached. While the local operations may be negatively impacted by the reputational fallout that could result from a default, the debt has no recourse to Netcare’s South African operations. Accordingly, GCR considers there to be limited impact from the eventual refinancing deal, or lack thereof. As delays in refinancing GHG Propco 1’s debt have extended this rating consideration beyond the scope of a short term outlook, GCR has lifted the Rating Watch and placed Netcare’s ratings on Stable outlook.
GCR has also reviewed Netcare’s interim operational performance, and has affirmed that the group’s domestic credit protection metrics remain aligned to the current ratings. Despite the slowing economy, Netcare’s local top line performance has remained stable, with revenue rising to a high of R15.5bn in F13 (F12: R14.6bn) and by 8% YOY in 1H F14. The sustained focus on enhancing operational efficiencies saw the operating margin widen to 17.7% in F13 (F12: 16.9%), and further to 18.4% in 1H F14 (1H F13: 17%). Note has been taken of restatements made to F13 results, mainly due to the adoption of changes in accounting standards, which had a modest impact on previously reported turnover and profit. Domestic debt has fluctuated within a narrow range over the review period, registering at R4.5bn at 1H F14 (FYE13: R4bn). This saw net debt to equity and net debt to EBITDA rise slightly to 43% and 110% respectively (FYE13: 39%; 98%). Debt serviceability remains robust, with net interest cover at 20.1x (F13: 28.4x; 1H F13: 18.1x). A portion of Netcare SA’s maturing debt is expected to be repaid during 2H F14.
Looking ahead, upward rating movement may be considered after the refinancing of GHG Propco 1 debt. Strong top line performance and continued cost rigour, translating to robust profitability and sound credit protection metrics, could also result in upward rating migration in the medium term. However, punitive regulatory changes stemming from the local Competition Commission inquiry into private healthcare or other unanticipated operational constraints may warrant negative rating action. In addition, a material deterioration in Netcare’s domestic performance due to persistently weak macroeconomic fundamentals could impair its credit risk profile.
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NATIONAL SCALE RATINGS HISTORY
Initial rating (Jan/2001)
Long term: A-(ZA); Short term: A1-(ZA)
Last rating (Dec/2013)
Long term: A(ZA); Short term: A1(ZA)
Rating Watch: Yes
Sector Head: Corporate & Public Sector Debt Ratings
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Criteria for Rating Corporate Entities, updated August 2013
Netcare Limited credit rating reports, 2001-2013
RATING LIMITATIONS AND DISCLAIMERS
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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), unaudited results for the six months to March 2014, 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.
GCR lifts the Rating Watch on Netcare Limited, and affirms the rating of A(ZA).