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Rating action

Scope Ratings GmbH (Scope) has today affirmed its BB/Stable issuer rating on JSC Evex Hospitals (Evex). Scope has also affirmed its BB rating for senior unsecured debt.

Rating rationale

Scope's rating affirmation for Evex is driven by operating cash flow generation keeping financial results in comfortable territory. As anticipated, the impact of Covid-19 caused a partial interruption in Evex' business activities in 2020. Negative organic growth of around 6% in 2020 was the result of limited inpatient admissions and postponed elective care during lockdown, particularly in the second quarter. Sales recovered during the second half of 2020 despite a suspension of guarantee letters for government-funded elective treatments. Although top-line growth was negatively affected by the disposal of the High Technology Medical Centre (HTMC) and Fifth Clinical Hospital, cash proceeds of GEL 32.8m gave the company additional financial flexibility.

Evex’s business risk profile (assessed at BB) remains dominant in the fragmented Georgian healthcare service industry, with around 18% of the market by number of clinical beds and around 20% of the market by sales, while its market position remains constrained by a relatively limited addressable market. Despite negative top-line performance in 2020, Scope believes organic growth from ramped-up hospitals along with increased utilisation levels and the ability to control direct salary rates will help the company achieve mid-single-digit revenue growth and protect cash flow generation during the next few years.

Although several safety and regulatory standards that have been introduced on the market have added to Evex's competitive advantage in this fragmented market, Scope believes that efforts to reform healthcare reimbursement, prices, and access in the coming years will be incremental rather than dramatic. However, Scope underscores that Evex has significant risk due to its continued high dependence on government-funded revenue streams, as any changes to its reimbursement portfolio or prices could have a significant adverse effect on the company's business performance (credit-negative social ESG factor).

Evex’s financial risk profile (assessed at BB) is supported by comfortable operating profitability, reflected in substantial cash flow generation. A slight deterioration in operating performance due to the Covid-19 pandemic benefited from higher cash conversion rates and a significantly larger cash cushion from received cash proceeds low return generating hospital’s divestiture.

Operating cash flow is expected to be weaker in 2021 as a result of the collection period for lower revenues generated during the 2020 lockdown, but annual expected capex in the low double-digit million range (GEL 15-20m) continues to be valid, and this will still provide an additional benefit to financial flexibility. Scope's rating case presumes that leverage will gradually return to around 3.0x (2021E: 3.2x 2022E: 3.1x).

Scope considers Evex’s liquidity to be adequate. Committed credit lines are limited. Nevertheless, a significant cash buffer of GEL 67m and high EBITDA cash conversion, reflected in expected positive free operating cash flow in 2021-2023, should be sufficient to fully cover (re-)financing needs. Short-term debt is expected to peak in 2022 consisting of GEL 50m senior secured bond and GEL 25m bank debt. While such high debt positions hardly be redeemed from company’s operating business, Scope believes Evex can easily refinance debt with well-established relationship with local banks as well as international financial institutions like the European Bank for Reconstruction and Development and/or still sizable intercompany loans on balance could be claimed if required.

The agency has not made any explicit adjustments to supplementary rating drivers. It considers changes in Evex’s ownership structure to be credit-neutral. While the medium-term strategy that Georgia Capital (the ultimate owner of Evex) has publicly communicated limits visibility and raises concerns about a potential upstream dividend burden on Evex should GC dispose one of its dividend-paying divisions, Scope believes that relatively high contributions to the parent will likely move with operating results and will not have a significant negative impact on financial metrics.

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

Outlook and rating-change drivers

The Stable Outlook reflects Scope's expectation that resumed elective care treatments and organic growth of ramped-up hospitals will rebound sales while SaD/EBITDA remains below 4.0x on a sustained basis.

A positive rating action could be warranted if SaD/EBITDA (Scope-adjusted figures) consistently trends below 3x. A decrease in leverage could be achieved by increasing profitability via organic growth, limited capex, and lower intercompany loan levels, all of which are in the company's explicit financial targets. However, a positive rating action is deemed to be unlikely in the foreseeable future given the company’s scope and outreach in the emerging market that is 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 below 5% and SaD/EBITDA of above 4x on a sustained basis or change to aggressive financial policy. The weak financial performance could be triggered by an adverse change in regulations, putting operating profitability under pressure or higher-than-expected dividend payouts.

Long-term debt rating

Scope has affirmed the senior unsecured debt at BB including GEL 50m (ISIN GE2700603881-1-02) bond reflecting Scope’s expectations about average recovery for senior unsecured debt positions in the hypothetical event of a company default. The recovery analysis is based on a hypothetical default scenario in 2023, which assumes outstanding senior unsecured debt of GEL 50m in addition to GEL 169m in senior secured loans.

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

Methodology
The methodologx used for these Credit Ratings and Outlook, (Corporate Rating Methodology, 26 February 2020), is available on https://www.scoperatings.com/#!methodology/list.
Scope Ratings GmbH and Scope Ratings UK Limited apply the same methodologies/models and key rating assumptions for their credit rating services, while Scope Hamburg GmbH’s methodologies/models and key rating assumptions are different from those of Scope Ratings GmbH and Scope Ratings UK Limited.
Information on the meaning of each Credit Rating category, including definitions of default, recoveries, Outlooks and Under Review, can be viewed in ‘Rating Definitions – Credit Ratings, Ancillary and Other 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 Credit Rating performance report at https://www.scoperatings.com/#governance-and-policies/regulatory-ESMA. 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 Ratings’ definitions of default and Credit 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 factors) are incorporated into the Credit Rating can be found in the respective sections of the methodologies or guidance documents provided on https://www.scoperatings.com/#!methodology/list.
The Outlook indicates the most likely direction of the Credit Ratings if the Credit Ratings were to change within the next 12 to 18 months.

Solicitation, key sources and quality of information
The Rated Entity and/or its Related Third Parties participated in the Credit Rating process.
The following substantially material sources of information were used to prepare the credit rating: the Rated Entity, public domain and Scope Ratings' internal sources.
Scope Ratings considers the quality of information available to Scope Ratings on the Rated Entity or instrument to be satisfactory. The information and data supporting the Credit Ratings originate from sources Scope Ratings considers to be reliable and accurate. Scope Ratings does not, however, independently verify the reliability and accuracy of the information and data. Prior to the issuance of the Credit Rating action, the Rated Entity was given the opportunity to review the Credit Ratings and/or Outlook and the principal grounds on which the Credit Ratings and/or Outlook are based. Following that review, the Credit Ratings were not amended before being issued.

Regulatory disclosures
These Credit Ratings and Outlook are issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0. The Credit Ratings and Outlook are UK-endorsed
Lead analyst: Zurab Zedelashvili, Senior Analyst
Person responsible for approval of the Credit Ratings: Sebastian Zank, Executive Director
The Credit Ratings/Outlook were first released by Scope Ratings on 11 July 2019. The Credit Ratings/Outlook were last updated on 16 July 2020.

Potential conflicts
See www.scoperatings.com under Governance & Policies/EU Regulation/Disclosures for a list of potential conflicts of interest related to the issuance of Credit Ratings.

Conditions of use/exclusion of liability
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