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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

The rating affirmation is driven by predictable revenue streams with high EBITDA cash conversion capability. Pandemic-related lockdowns and restrictions have had a major impact on the hospitals segment, leading to a reduction in patient footfall at healthcare facilities for elective care, which continued in FY 2021. Top line growth of 24.7% in FY 2021 was mainly due to a low base in FY 2020 and full year Covid-related income (27% of total sales in FY 2021). The result of overall operating performance was better-than-expected for FY 2021.

Evex’s business risk profile (assessed BB) remains supported by its dominant market position in the fragmented Georgian healthcare service industry. It had around 18% of the market by number of clinical beds and around a 20% market share by sales as of YE 2021. Its market position remains constrained by a relatively limited addressable market (less than GEL 2.0bn). The rebound in demand for regular elective care and outpatient services, along with Covid-19 treatments, resulted in positive sales growth in FY 2021 despite pandemic-related restrictions. Top line growth of 24.7% in FY 2021 was mainly due to a low base in FY 2020 and full year Covid-related income (27% of total sales in FY 2021). Scope believes Evex seeks lucrative growth (mid-single-digit revenue growth) in the medium term mainly due to increased utilisation potential from fully ramped-up hospitals coupled with an expansion of specialist capabilities. However, short-term growth could be muted, with lower-than-expected GDP growth for the country as the consequence of elevated inflation and inflationary risks created by the Russia-Ukraine war.

Several safety or regulatory standards have been introduced on the market (the main reason behind higher-than-expected capex for YE 2021). This gives Evex a competitive advantage in its fragmented market. However, Scope believes that efforts to reform prices, access and healthcare reimbursements in the universal healthcare programme (UHC) will be incremental rather than dramatic in the next few years. Scope underlines the significant risk in the company’s high dependence on governmental-funded revenue streams as negative changes to the reimbursement rates could have a significant adverse effect on business performance (negative social ESG factor).

The direct salary rate showed an improvement in FY 2021, falling by 3.1 pps despite pandemic-related bonuses granted to medical personnel. In the short term, Scope expects pressure on EBITDA margin as a consequence of restructuring in the cost base of Covid hospitals and a phase-out of government contracts. The ability to control direct salary rates coupled with operating efficiency (positive social ESG factor) will help the company keep its EBITDA margin above 20% in the next few years.

Evex’s financial risk profile (assessed at BB) is supported by comfortable operating profitability, reflected to robust and predictable cash flow generation. Better-than-expected operating performance for 2021 was mainly driven by elevated EBITDA as Covid-related revenue streams had relatively high profit margins. Scope expects weaker operating cash flow in 2022 as a result of the return to a normal, average collection period for the revenues generated in 2021-2022 while Covid-related revenues (which benefited from a relatively short collection period and high margins) fade away. Annual expected capex, with its increased share of maintenance, remains unchanged in the low double-digit million range (around GEL 20m). This is expected to push free operating cash flow into negative territory. Although expected negative free operating cash flow will limit room to reduce financial debt in the short term, Scope’s rating case incorporates leverage returning to around 2.5x in the medium term (2023E: 2.6x). Deleveraging will be driven by increasing EBITDA following the company’s increased utilisation levels from fully ramped-up hospitals while indebtedness remains at current levels. For the same reasons, Scope expects the funds from operations/Scope-adjusted debt (SaD) ratio to follow a similar trend, improving to levels near 30% from 2023.

The relatively high cost of debt in Georgia puts pressure on EBITDA/interest coverage. To curb inflationary pressure, the National Bank of Georgia continues to tighten monetary policy. The refinancing rate is up 2.0 pps over the last twelve months, to 11% from 9%, which will cause Evex’s EBITDA/interest coverage to deteriorate in FY 2022. Scope expects the ratio to remain at a modest level near 3.5x in 2022-23, supported by a proven track record of increased EBITDA and expected deleveraging in the medium term.

Scope views Evex’s liquidity as adequate. Committed credit lines are limited. Short-term debt peaked at GEL 110m in FY 2021 (consisting of a GEL 50m senior secured bond and GEL 56m of bank debt). Such high debt positions can hardly be redeemed from the company’s operating business, but Scope does not anticipate any difficulties for refinancing given well-established relationships with local banks as well as international financial institutions like the European Bank for Reconstruction and Development, plus expected disposals of hospitals. The company has confirmed that part of its short-term debt was already refinanced through bank loans. It is currently in the process of deciding on how to refinance its senior secured debt obligation maturing in December 2022. It is considering issuing a new bond and/or additional bank loans or bridge loans.

There are no explicit adjustments for supplementary rating drivers. Scope deems changes in Evex’s ownership structure to be credit-neutral. While Georgia Healthcare Group is expected to contribute most dividend inflows at the Georgia Capital PLC level, Scope believes this reflects the company’s overall high profit generation and that it is appropriate in the context of a financial policy orientated around preserving the present rating – subordinated to maintain management’s leverage goals at the subsidiary level. Georgia Capital PLC’s annual report 2021 underlines its commitment to leverage levels for operating holdings.

One or more key drivers of the credit rating action is considered an ESG factor.

Outlook and rating-change drivers

The Stable Outlook reflects Scope’s expectation that resumed elective care treatments after the Covid-19 pandemic and the organic growth of ramped-up hospitals will cause sales to rebound while the SaD/EBITDA ratio remains below 4.0x on a sustained basis. The Stable Outlook also assumes a successful refinancing of the GEL 50m bond by Dec 2022.

A positive rating action is deemed to be remote in the foreseeable future given the company’s scope and reach in the emerging market of the Republic of Georgia (rated BB/Stable). If there is a positive rating development in the sovereign, a positive rating action on Evex could be considered if the SaD/EBITDA ratio consistently trended below 3x and the company improved its diversification. A decrease in leverage could be achieved by increasing profitability via organic growth, limited capex or a lower level of intercompany loans, which are also explicit financial targets for the company.

A negative rating action could result from a deterioration in credit metrics, as indicated by free operating cash flow below 5% and an SaD/EBITDA ratio of above 4x on a sustained basis or a change to aggressive financial policy. Weak financial performance could be triggered by an adverse change in regulations that puts operating profitability under pressure, or it could follow from higher-than-expected dividend payouts.

Long-term debt rating

Scope has affirmed senior unsecured debt at BB, including a GEL 50m (ISIN GE2700603881-1-02) bond. This reflects Scope’s expectation of an ‘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 2024, which assumes outstanding senior unsecured debt of GEL 50m in addition to GEL 175m 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 methodology used for these Credit Ratings and/or Outlook, (Corporate Rating Methodology, 6 July 2021), is available on https://scoperatings.com/governance-and-policies/rating-governance/methodologies.
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-governance/definitions-and-scales. Historical default rates of the entities rated by Scope Ratings can be viewed in the Credit Rating performance report at https://scoperatings.com/governance-and-policies/regulatory/eu-regulation. 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-governance/definitions-and-scales. 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://scoperatings.com/governance-and-policies/rating-governance/methodologies.
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 Ratings: public domain, the Rated Entity 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/or Outlook are issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0. The Credit Ratings and/or Outlook are UK-endorsed.
Lead analyst: Zurab Zedelashvili, Associate Director
Person responsible for approval of the Credit Ratings: Sebastian Zank, Managing Director
The Credit Ratings/Outlook were first released by Scope Ratings on 11 July 2019. The Credit Ratings/Outlook were last updated on 7 July 2021. 

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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