OREANDA-NEWS. S&P Global Ratings said today that it affirmed its 'BBB-' long - and 'A-3' short-term corporate credit ratings on Germany-based health care group Fresenius SE & Co. KGaA (FSE). The outlook is stable.

The affirmation follows FSE's announcement that it acquired Spanish private hospital group IDC Salud Holding SLU. The affirmation reflects our view that the announced transaction is neutral to our assessment of FSE's business risk profile as strong and that FSE will continue to manage its discretionary spending in a manner that will not lead its debt protection metrics to deteriorate beyond the levels we assume under our base case. Specifically, the affirmation reflects our forecast that the company will maintain adjusted debt to EBITDA below 4x.

With the purchase of IDC, the group is gaining a further diversification away from its dialysis services business, and is especially complementary for FSE-owned hospital group Helios. When fully merged, the division will cement its positon as a leading player in the European private hospital market, ahead of Germany-based Asklepios. The transaction offers an opportunity for Helios to use IDC expertise in the private payer and public-private partnership markets, and a potential for future cost synergies, especially from common procurement benefiting from its sizable scale and geographical coverage, translating into EBITDA margin growth.

IDC is the leading operator in the Spanish private hospital market, which we believe offers: a favorable regulatory environment; good-quality earnings; and long-term volume growth prospects, as a result of an aging population and the increasing prevalence of diseases such as diabetes and cancer. Following the merger with Quiron in 2014, IDC has focused on margin improvement benefiting, for example, from combined procurement and a stronger position in negotiations with payers. However, IDC still only has about 13% market share in the highly fragmented Spanish private hospital market. The IDC group benefits from good national coverage with exposure to the biggest cities in Spain, such as Madrid, Barcelona, Valencia, Seville, and Bilbao, and a revenue mix with about 60% of its revenues generated from privately funded care.

FSE's business risk continues to benefit from growing diversification, supported by divisions Kabi (hospital supplies and services) and Helios (hospital operations) having reached critical size by a combination of external and internal growth over recent years. FSE's largest division Fresenius Medical Care accounts for over 50% of FSE's EBITDA and is a global market-leader in providing products and services for patients with chronic kidney failure and no alternative treatment options. Regulatory pricing pressures, particularly in the U. S., are mitigated in our view by growing patient numbers, efficiency gains, and the group's increasing presence in less-regulated and emerging markets.

Under our base case, we project that FSE will achieve revenues of about €33.5 billion-€36 billion with adjusted EBITDA of about €7.4 billion-€8 billion in 2017 and 2018, with IDC contributing with about €2.5 billion in revenues and about €500 million of adjusted EBITDA.

As the transaction is likely to close at the end of 2016, we assume limited contribution from IDC's EBITDA. We forecast project-adjusted debt to EBITDA to be about 3.8x in 2016, but declining to about 3.2x and 2.9x in 2017 and 2018, respectively, benefiting from full-year contribution of IDC EBITDA and cash flows.

In our view, FSE's metrics will remain comfortably in the significant range, reflecting the group's strong cash-flow generation and ability to deleverage. However, we continue factor in our rating assessment the possibility of a further material acquisition, which we reflect in our negative financial policy assessment.

The stable outlook reflects FSE's track record of assimilating sizable acquisitions and reducing debt relatively quickly because of its strong cash-generating capacity.

We see the group pursuing a financing strategy that will enable it to maintain debt-protection metrics commensurate with the ratings, expressed by debt to EBITDA of about 3.5x and interest coverage by EBITDA of about 5x on average over the next three years.

A positive rating action would, in our view, require further progress on sustained deleveraging, such that credit metrics would fall into and remain in the stronger end of our significant financial risk category (debt to EBITDA of below 3.5x and EBITDA interest coverage of above 5x).

Conversely, given the group's positive operating fundamentals, negative rating actions would most likely be prompted by decisions from either FSE or FME to change their deleveraging plans in favor of faster cash absorption through acquisitions, internal investment, or shareholder returns. If this resulted in sustained leverage above 4x, a negative rating action would be possible. We see downside from operating performance as less likely, but it could be triggered by operating margins deteriorating significantly. This could occur if the company were unable to offset pressure from reimbursement changes, mainly in the U. S., with operating efficiency delivered by the rest of its business.