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France-Based Nursing Homes Operator Financiere Colisee Rated ‘B’ On Acquisition Of Armonea; Outlook Negative

  • On Feb. 19, 2019, French nursing homes operator Financière Colisée SAS, announced its acquisition of Armonea pending regulatory approval, which will be funded partly by new debt and cash, and a €230 million equity injection.
  • By combining the two companies, Financière Colisée will almost double in size and improve its payer profile, leading us to revise upwards our assessment of the company's business risk profile.
  • We are therefore assigning our 'B' ratings to Financière Colisée and to the proposed €770 million senior secured term loan B and the €130 million revolving credit facility. The recovery rating for the debt is '3'.
  • The negative outlook reflects our view that, given the size of the transaction, the company might fail to seamlessly integrate the newly acquired assets and deliver on its revenue-growth plan, accruing higher-than expected costs and leading to a reduced cash cushion and delayed deleveraging.
PARIS (S&P Global Ratings) March 25, 2019--S&P Global Ratings today took the 
ratings actions listed above. 

The rating action follows the acquisition of Belgian nursing homes operator 
Armonea by France's fourth-largest nursing homes operator Financière Colisée. 
The transaction is expected to close beginning of May 2019, subject to 
regulatory approvals. 

The acquisition will be funded partly by new debt and cash, including a €770 
million term loan and a €230 million equity injection. In addition, the 
group's €130 million revolving credit facility (RCF) will fund working capital 
requirements, greenfield projects, and mergers and acquisitions, comprising 
mainly bolt-on acquisitions. The equity injection allows IK Investment 
partners, Financière Colisée's majority owner, to remain the majority 
shareholder in the new entity, with managers and founders retaining 14% of the 
enlarged group. Financière Colisée's will repay all Armonea's outstanding debt 
and acquire all company shares. 

In our view, the transaction will help improve the combined group's scale and 
the diversification of its payer profile. However, integration risks, the 
dilutive effect of Armonea's leasehold operating model, and the combined 
group's lower profitability margins, will partially offset these improvements. 

This combination will create the fourth-largest nursing homes operator in 
Europe after Korian, Orpea, and HomeVi. By combining both entities, we expect 
Financière Colisée will have a revenue base of €1 billion, just behind HomeVi 
with €1.3 billion. Following the integration of Armonea, the No. 2 player in 
Belgium, the combined group will operate 280 facilities spanning France, 
Belgium, Spain, Germany, and Italy.

In our view, improved geographic diversification as a result of the 
acquisition will limit the group's reliance on one country and underlying 
demographic and reimbursement trends, therefore providing greater revenue and 
profit stability. The two entities complement each other geographically, with 
Armonea present in Belgium and, to more-limited extent, in Germany and Spain 
(mainly in Valencia), with Financière Colisée focused on France, with a small 
presence in Northern Italy and Spain (in Catalonia). On a pro-forma basis, the 
group will derive 44% of revenue from France and 37% from Belgium, the 
remaining being split between Spain (10%), Germany (7%), and Italy (3%). 

Furthermore, we believe entry into the Belgian nursing home market will have a 
positive effect on the group, given the country's stable regulatory 
environment, relatively high barriers to entry in the form of bed license caps 
that drive high occupancy rates, and predictable reimbursement via a 
cost-pass-through mechanism.

In Belgium, income per resident is a mix of state-paid reimbursement fees 
based on acuity, and residency fees paid by clients for accommodation and 
extra services (wifi, laundry, and other hotel-like services). Both fee types 
are linked to inflation, and residency fees can only be increased above 
inflation upon the opening of new homes or the completion of refurbishments. 

Therefore, our improved assessment of Financière Colisée's business risk 
reflects our view that Financière Colisée's operating environment is stable 
and provides relatively good visibility.

The French market benefits from the government's well-defined reimbursement 
regime, mainly via pass-through contracts, which should continue to contain 
margin pressure. In the accommodation segment, which represents 65% of the 
revenues and is covered by private funding, prices for new residents are set 
by each nursing home. This allows operators to defend their margins through 
regular price increases, although these are capped for existing residents. 

This positive operating environment enables Financière Colisée to sustain 
profitability by progressively increasing its average daily rates for 
accommodation, as well as to constantly focus on achieving higher occupancy 
rates. Enhancing bed utilization turnover and improving service quality would 
support occupancy levels. 

We believe it will likely be challenging for Financière Colisée to materially 
improve margins at Armonea, as it did with other acquisitions. Armonea has a 
lower profitability (EBITDA margins of about 7%-8% after rent payments, 
compared with almost 14% at Financière Colisée on a stand-alone basis), 
reflecting its asset-light structure, with the majority of its homes leased, 
and relatively high labor costs. It also reflects the group's recent 
significant investments in various greenfields and the refurbishment of 
existing homes, which will mature over the coming years. 

We project the combined group will generate an S&P Global Ratings-adjusted 
EBITDA margin of about 24.5%, while the EBITDA margin after rental payments 
will be only about 11.0%. 

The combined group has an asset-light structure with the majority of its homes 
leased, including the newly acquired homes in Spain. Rents account for about 
14.0% of revenues. This exposes the group to additional fixed costs that need 
to be covered. We understand that the majority of rents are linked to 
inflation; however, this means that the group will need to increase its fees 
above those levels to meaningfully improve its margins.

Our assessment of Financière Colisée financial risk profile reflects the 
company's financial sponsor ownership. Our assessment is supported by our 
expectation of S&P Global Ratings-adjusted debt to EBIDTA of 6.8x-7.2x by the 
end of 2019, improving slightly to 6.4x-6.8x by the end of 2020, as the group 
benefits from the combined EBITDA and cash flow. Our debt calculation includes 
about €800 million of financial debt and about €1.0 billion of obligations 
under operating leases. It excludes the shareholders loans, which we do not 
view as debt-like. We do not deduct cash on the balance sheet from our debt 
calculation, because we believe it will likely be used to support growth. 

Due to the high portion of rents in the group's servicing structure, we focus 
on the fixed-charge cover ratio (adjusted EBITDA divided by rents and cash 
interest). We project that adjusted EBITDA before rental payments will be €245 
million-€265 million over the next 24 months, covering interest payments of 
€35 million and rent payments of €140 million by 1.5x. However, given the high 
proportion of fixed costs, we consider that any structural operational issues 
could hinder Financière Colisée's ability to cover its fixed costs. 

The financial risk profile benefits from marginally positive cash flow 
generation, which we expect will be over €10 million in 2019, reflecting our 
assumptions of working capital outflow of about €10 million and capital 
expenditure (capex) of about €35 million-€40 million, including investments in 
modernization of acquired facilities. In 2020, free operating cash flow (FOCF) 
is set to improve to above €20 million.

The negative outlook reflects our view that, given the size of the 
transaction, the company might fail to seamlessly integrate the newly acquired 
assets and deliver on its revenue-growth plan, accruing higher-than expected 
costs and leading to a reduced cash cushion and delayed deleveraging. 

We could consider a downgrade if Financière Colisée was unable to generate 
positive free cash flow, or if there were liquidity or underlying structural 
operational issues. Structural issues could include an increasing mismatch 
between reimbursement fees evolution, projected volume growth, and operating 
costs, given the company's high fixed-cost base, which could lead to a 
sustained deterioration of the adjusted fixed-charge coverage ratio to below 

We could revise the outlook to stable if the company smoothly executed the 
acquisition, reflected in continued profitable revenue growth. The company 
should also demonstrate a clear deleveraging trend, such that normalized 
cash-paying leverage falls to significantly below 7.0x, with the fixed-charge 
coverage improving to at least 1.5x, given the existing average cost of debt. 
This would most likely result from the company delivering on planned occupancy 
level increases, and by managing both variable and fixed costs in a way that 
supports profitability. 

We would also need to see a balanced approach to the company's expansionary 
growth plans, such that further acquisitions and extraordinary capex could be 
funded from internally generated cash flows.
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