The latest information on the rating, including rating reports and related methodologies, is available via this LINK.

Rating action

Scope Ratings has today affirmed its issuer rating of BB/Stable for Georgia-based JSC Evex Hospitals. The agency has also affirmed its rating of BB for senior unsecured debt.

Rating rationale

Evex’s business risk profile (rated BB) benefits from the healthcare service industry’s low cyclicality, medium entry barriers and low substitution risk. Evex remains dominant in the fragmented Georgian healthcare service industry. Around 10% revenue growth in 2019 was achieved through increased inpatient admissions, additional services in selective care and the successful ramp-up of the Tbilisi Referral Hospital and Caucasus Medical Centre.

In 2020, the company’s top line will take a double hit from: i) the Covid-19 pandemic leading to the suspension of elective procedures; and ii) adhoc adverse regulatory changes (ESG factor) in reimbursement rates for intensive care and cardiac services. Scope notes that the economic downturn may intensify and recovery may be subdued next year, while current assumptions incorporate a rebound in sales in the short term.

Diversification remains the main constraint for Evex’s business risk profile as the company operates in one country and one industry. A heavy dependence on government-funded healthcare programmes further limits diversification.

Scope believes that Evex will be able to keep profitability margins at close to 20% in 2020. This is despite the adverse effect of diminishing marginal returns as direct personnel costs are fixed in some hospitals, partially offset by a temporary income tax break incentive from the government.

Evex’s financial risk profile (rated BB) is supported by its healthy operating profitability, which translates into a good underlying cash generation capability.

2019 financial results remained in comfortable territory despite a slight deterioration in expected leverage. The deterioration was mainly driven by higher-than-expected capex investments, primarily to enhance digitalisation by providing an in-house software platform. Scope notes that Evex’s net debt and leverage have grown due to the provision of intercompany loans to Evex clinics and its parent in the past few years.

Despite relatively high interest rates in Georgia, EBITDA interest cover remained in comfortable territory, benefiting from interest received on intercompany loans. Scope expects interest coverage of towards 4.0x in 2021-2022.

Scope views liquidity as adequate. Despite a lack of committed credit lines, expected positive free operating cash flow in 2020-2022 should be sufficient to fully cover (re)-financing needs. In addition, the company’s liquidity profile benefits from the bullet repayment structure of its bonds.

Outlook and rating-change drivers

The Stable Outlook reflects Scope’s expectations that the Covid-19 pandemic will not have a negative long-term effect on the company’s operations and that Scope-adjusted debt/EBITDA will remain below 4.0x on a sustained basis.

A positive rating action could be indicated by a Scope-adjusted debt/EBITDA of consistently below 3x. The decrease in leverage could be achieved by increasing profitability via organic growth, limited capex and lower intercompany loan levels, which are also explicit financial targets of the company. However, a positive rating action is deemed to be remote in the foreseeable future given the company’s scope and outreach in the emerging market of the Republic of Georgia (rated BB/Negative at Scope).

A negative rating action could result from a deterioration in credit metrics, as indicated by free operating cash flow of below 5% and Scope-adjusted debt/EBITDA of above 4x on a sustained basis. The weak financial performance could be triggered by an adverse change in regulations, putting operating profitability under pressure.

Long-term debt ratings

Scope has affirmed senior unsecured debt at BB, including the GEL 50m bond (ISIN GE2700603881-1-02). Scope’s recovery analysis indicates a relatively high recovery rate for senior unsecured debt. However, the agency has limited the uplift for the instrument to zero notches (average recovery) due to the risk of an appreciation in foreign-currency-denominated debt and the risks surrounding bankruptcy resolution in Georgia, an emerging market.

One or more key drivers for the credit rating action are ESG factors.

Stress testing & cash flow analysis
No stress testing was performed. Scope performed its standard cash flow forecasting for the company.

Methodology
The rmethodology used for this rating and rating outlook (Corporate Rating Methodology, published 26 February 2020) is available on https://www.scoperatings.com/#!methodology/list.
Information on the meaning of each rating category, including definitions of default and recoveries can be viewed in the “Rating Definitions - Credit Ratings and Ancillary Services” published on https://www.scoperatings.com/#!governance-and-policies/rating-scale. Historical default rates of the entities rated by Scope Ratings can be viewed in the rating performance report on https://www.scoperatings.com/#governance-and-policies/regulatory-ESMA. Please also refer to the central platform (CEREP) of the European Securities and Markets Authority (ESMA): http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml. A comprehensive clarification of Scope’s definitions of default and rating notations can be found at https://www.scoperatings.com/#governance-and-policies/rating-scale. Guidance and information on how Environmental, Social or Governance factors (ESG factor) are incorporated into the rating can be found in the respective sections of the methodologies or guidance documents provided on https://www.scoperatings.com/#!methodology/list.
The rating outlook indicates the most likely direction of the rating if the rating were to change within the next 12 to 18 months.

Solicitation, key sources and quality of information
The rated entity and/or its agents participated in the rating process.
The following substantially material sources of information were used to prepare the credit rating: public domain, the rated entity and Scope internal sources.
Scope considers the quality of information available to Scope on the rated entity or instrument to be satisfactory. The information and data supporting Scope’s ratings originate from sources Scope considers to be reliable and accurate. Scope does not, however, independently verify the reliability and accuracy of the information and data.
Prior to the issuance of the rating or outlook action, the rated entity was given the opportunity to review the rating and/or outlook and the principal grounds on which the credit rating and/or outlook is based. Following that review, the rating was not amended before being issued.

Regulatory disclosures
This credit rating and/or rating outlook is issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0.
Lead analyst Zurab Zedelashvili, Analyst
Person responsible for approval of the rating: Sebastian Zank, Executive Director
The ratings/outlooks were first released by Scope on 11 July 2019.

Potential conflicts
Please see www.scoperatings.com for a list of potential conflicts of interest related to the issuance of credit ratings. Scope provided the following ancillary services to the rated entity and/or its agents within two years preceding this credit rating action: Credit Estimate.*

Conditions of use / exclusion of liability
© 2020 Scope SE & Co. KGaA and all its subsidiaries including Scope Ratings GmbH, Scope Analysis GmbH, Scope Investor Services GmbH and Scope Risk Solutions GmbH (collectively, Scope). All rights reserved. The information and data supporting Scope’s ratings, rating reports, rating opinions and related research and credit opinions originate from sources Scope considers to be reliable and accurate. Scope does not, however, independently verify the reliability and accuracy of the information and data. Scope’s ratings, rating reports, rating opinions, or related research and credit opinions are provided ‘as is’ without any representation or warranty of any kind. In no circumstance shall Scope or its directors, officers, employees and other representatives be liable to any party for any direct, indirect, incidental or other damages, expenses of any kind, or losses arising from any use of Scope’s ratings, rating reports, rating opinions, related research or credit opinions. Ratings and other related credit opinions issued by Scope are, and have to be viewed by any party as, opinions on relative credit risk and not a statement of fact or recommendation to purchase, hold or sell securities. Past performance does not necessarily predict future results. Any report issued by Scope is not a prospectus or similar document related to a debt security or issuing entity. Scope issues credit ratings and related research and opinions with the understanding and expectation that parties using them will assess independently the suitability of each security for investment or transaction purposes. Scope’s credit ratings address relative credit risk, they do not address other risks such as market, liquidity, legal, or volatility. The information and data included herein is protected by copyright and other laws. To reproduce, transmit, transfer, disseminate, translate, resell, or store for subsequent use for any such purpose the information and data contained herein, contact Scope Ratings GmbH at Lennéstraße 5 D-10785 Berlin.

Scope Ratings GmbH, Lennéstraße 5, 10785 Berlin, District Court for Berlin (Charlottenburg) HRB 192993 B, Managing Director: Guillaume Jolivet. 

* Editor’s note: This sentence was added on 19 October 2020. It was erroneously omitted upon publication of the credit rating action on 16 July 2020.