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Research Update: Genesis Care Pty Ltd. Downgraded to 'CCC-' From 'CCC' On Heightened Default Risk; Outlook Negative

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Research Update: Genesis Care Pty Ltd. Downgraded to 'CCC-' From 'CCC' On Heightened Default Risk; Outlook Negative

Rating Action Overview

  • High debt and rising borrowing costs will worsen the liquidity pressure on Genesis Care Pty Ltd (GenesisCare). We believe the Australia-based cancer care service provider may undertake a distressed exchange or other form of debt restructuring that we would consider a default over the next six months.
  • We revised GenesisCare's liquidity to weak from less than adequate. This is based on our forecast of depleting cash balances, shareholder loans due in November 2023, high capital expenditure (capex), and weakened earnings.
  • On Feb. 8, 2023, we lowered our long-term issuer credit rating on GenesisCare to 'CCC-' from 'CCC'. At the same time, we lowered our long-term issue ratings on the senior secured term loans the company guarantees to 'CCC-' from 'CCC'. We also lowered the recovery estimate for the issue ratings to '4' from '3'. This has no impact on the ratings of the rated debt.
  • The negative outlook reflects the possibility that we could lower the ratings if GenesisCare announces a distressed exchange or other form of debt restructuring that we consider a default over the next six months.

Rating Action Rationale

GenesisCare may complete a distressed exchange or debt restructuring over the next six months to improve its capital structure and alleviate liquidity pressures. The company's highly leveraged balance sheet continues to weigh on the ratings. GenesisCare is unlikely to generate positive free operating cash flow (FOCF). This is given elevated debt, challenging operating conditions particularly in the U.S., and rising interest expenses (despite hedging) that are weakening earnings.

GenesisCare has secured waivers on loan repayment requirements to shareholders, KKR & Co. Inc. (A$50 million) and China Resources (Holdings) Co. Ltd. (A$29 million). The requirements were triggered by the company's sale of its cardiology business.

Both shareholder loans will mature on Nov. 30, 2023. There is potential for a six-month extension, subject to the joint discretion of both shareholders. These loans had provided significant support for GenesisCare's liquidity, with the group holding a cash balance of US$154 million as of Sept. 30, 2022.

Despite the waivers, GenesisCare's liquidity has deteriorated and is now weak. Our base case assumes negative FOCF for fiscal years 2023-2024 (year-end June 30). This, together with rising interest expenses for floating-rate debt, and the pending maturity of the shareholder loans have worsened the liquidity position.

Without a significant rebound in earnings or new equity, we view a distressed exchange or debt restructuring as being increasingly likely within the next six months.

GenesisCare is likely to consider a below-par debt exchange.  The company's term loan B (TLB) is trading at about 35 cents on the dollar, trading within a range of 30-40 cents in the past few months. Given high debt and onerous leverage, we believe a below-par debt repurchase is a real possibility. We would view such a transaction as a default if the lenders do not receive the full amount as originally promised.

Patient volumes and revenue collections for the U.S. business may improve further.  GenesisCare believes fiscal 2022 represented the low point of its earnings cycle. In a lenders' update in November 2022, the company reported traction in radiotherapy volumes. New sites and services in Australia and Europe continued to increase market share. Additionally, fee-collection processes in the U.S. continued to improve. In August 2022, monthly cash collections were the second highest since GenesisCare acquired 21st Century Oncology Inc. (21C) in 2020.

These improvements should translate to moderate earnings growth for the underlying business in fiscal 2023. However, an onerous capital structure and operational difficulties may constrain the earnings rebound for GenesisCare.

Inflation, such as higher labor costs, is likely to affect profitability and cash flow over the next 12 months. Although we consider demand for cancer care services to be largely recession-resistant, a sustained weakening of the macroeconomic environment could pose downside to our forecasts.

Outlook

The negative outlook on GenesisCare reflects our view of the company's highly leveraged capital structure, which we consider as unsustainable. This, together with continued challenging conditions, may lead the company to undertake a distressed exchange or other form of debt restructuring that we would consider as a default over the next six months.

Downside scenario

We could lower our ratings on GenesisCare if it announced a distressed exchange or other form of debt restructuring that we would classify as a default.

Upside scenario

We could revise the outlook to stable or consider an upgrade if we consider that the risk of a distressed exchange or other form of default has materially diminished. This could result if additional equity significantly delevers the group's balance sheet and improves liquidity.

Company Description

GenesisCare is one of the world's largest providers of integrated cancer care, with more than 350 centers globally. The company is one of the largest, independent providers of oncology treatment in the U.S., with more than 300 centers, mostly in Florida and California. It also has 40 radiotherapy centers in Australia, 17 in Spain, and 14 in the U.K.

GenesisCare treats all types of adult cancers. These include breast, prostate, skin, and brain cancers. Cancer treatments include radiation therapy, chemotherapy, and theranostics.

On Sept. 30, 2022, GenesisCare completed the divestment of its cardiology business to Adamantem Capital. The company will continue to operate its cardiology, sleep and respiratory medicine network under the GenesisCare brand during a transitional period, with services available to patients as usual.

GenesisCare is owned by China Resources (36%), its own management and doctors (33%), and KKR (31%).

Our Base-Case Scenario

Assumptions
  • Australia's real GDP to grow 1.7% in 2023;
  • U.S real GDP to decline 0.1% in 2023;
  • U.K real GDP to decline 1.0% in 2023;
  • Spain's real GDP to grow 0.9% in 2023;
  • Average Australian dollar to U.S dollar of 0.66 in 2023 and 0.67 in 2024;
  • Average Australian dollar to British pound sterling of 0.54 in 2023 and 0.51 in 2024;
  • Average Australian dollar to euro of 0.64 in 2023 and 0.61 in 2024;
  • S&P Global Ratings-adjusted EBITDA margins of 7.5%-8.5% in fiscal 2023 and 8.5%-9.5% in fiscal 2024;
  • Capex of about US$95 million in fiscal 2023;
  • No material debt-funded acquisitions over the next 24 months; and
  • No dividend distributions over the next 24 months.
Key metrics

We expect the key metrics to remain in the highly leveraged category. In the next six to 12 months, we estimate GenesisCare will have a debt-to-EBITDA ratio of above 20x. We project EBITDA interest coverage of about 0.7x for fiscal 2023 and 0.8x for fiscal 2024.

Liquidity

We assess GenesisCare's liquidity as weak. We forecast a material deficit for sources of liquidity less uses of liquidity for the next 12 months should earnings not significantly rebound or the company fails to raise additional equity.

This is primarily due to a depleting cash balance, high debt-servicing costs and debt amortization, and capex requirements. In recent months, GenesisCare's TLB has been trading at 30-40 cents on the dollar. This indicates a poor standing in credit markets.

Sources and uses of funds for the 12 months ending Dec. 31, 2023, are as follows:

Principal liquidity sources include:
  • Cash and liquid investments of US$154 million (as of Sept. 30, 2022).
Principal liquidity uses include:
  • About US$80 million of loan repayments to KKR and China Resources;
  • Negative cash funds from operations of about US$79 million;
  • Working capital outflows of about US$27 million; and
  • Capex of about US$90 million.

Issue Ratings - Recovery Analysis

Key analytical factors

Our recovery analysis for GenesisCare contemplates a hypothetical simulated default in 2023. The recovery rating of '4' and issue ratings of 'CCC-' on the existing A$227 million and €400 million secured first-lien TLB facilities due in 2025; A$150 million, €500 million, and US$350 million secured first-lien TLB facilities due in 2027; and A$200 million revolving credit facility due in 2024 reflect our expectations for a recovery of 45% (rounded estimate) in the event of default.

At the time of hypothetical default, we expect GenesisCare to complete a distressed debt exchange. This situation could arise if the company's earnings are significantly weak and cash flow generation is insufficient to service elevated borrowing costs. This leads to a deteriorated liquidity position and an unsustainable capital structure.

We value GenesisCare as a going concern. This is because we believe the company is likely to be reorganized due to the longer-term value of its quality healthcare services, value proposition to counterparties, and brand strength.

We applied a 5.5x valuation multiple to our estimated distressed emergence EBITDA of about US$157 million to arrive at a gross enterprise value of about US$865 million. The net enterprise value after administrative costs is about US$822 million.

Simulated default assumptions
  • Simulated year of default: 2023
  • Jurisdiction: Australia
  • EBITDA at emergence: US$157 million
  • EBITDA multiple of 5.5x
  • Gross enterprise value at emergence: US$865 million
Simplified waterfall
  • Net enterprise value at emergence (after 5% administrative costs): US$822 million
  • Estimated secured first-lien claims: about US$1,814 million
  • Recovery expectations: 30%-50% (rounded estimate: 45%)
  • Recovery rating: 4
ESG credit indicators: E-2; S-3; G-2

Related Criteria

Ratings List

Downgraded
To From

Genesis Care Pty Ltd.

Issuer Credit Rating CCC-/Negative/-- CCC/Negative/--

Genesis Specialist Care Finance UK Ltd.

Senior Secured CCC- CCC

GenesisCare USA Group Holdings Inc.

Senior Secured CCC- CCC
Revised
To From

Genesis Specialist Care Finance UK Ltd.

Senior Secured
AUD100 mil fltg rate Multicurrency Revolver-1 bank ln due 10/23/2024 CCC- CCC
Recovery Rating 4(45%) 3(50%)
AUD227 mil fltg rate Term B-1 bank ln due 10/23/2025 CCC- CCC
Recovery Rating 4(45%) 3(50%)
EUR400 mil fltg rate Term B-2 bank ln due 10/31/2025 CCC- CCC
Recovery Rating 4(45%) 3(50%)

GenesisCare USA Group Holdings Inc.

Senior Secured
AUD150 mil fltg rate Term B-3 bank ln due 03/19/2027 CCC- CCC
Recovery Rating 4(45%) 3(50%)
EUR500 mil fltg rate Term B-4 bank ln due 03/19/2027 CCC- CCC
Recovery Rating 4(45%) 3(50%)
US$350 mil fltg rate Term B-5 bank ln due 03/19/2027 CCC- CCC
Recovery Rating 4(45%) 3(50%)

S&P Global Ratings Australia Pty Ltd holds Australian financial services license number 337565 under the Corporations Act 2001. S&P Global Ratings' credit ratings and related research are not intended for and must not be distributed to any person in Australia other than a wholesale client (as defined in Chapter 7 of the Corporations Act).

Certain terms used in this report, particularly certain adjectives used to express our view on rating relevant factors, have specific meanings ascribed to them in our criteria, and should therefore be read in conjunction with such criteria. Please see Ratings Criteria at www.standardandpoors.com for further information. Complete ratings information is available to subscribers of RatingsDirect at www.capitaliq.com. All ratings affected by this rating action can be found on S&P Global Ratings' public website at www.standardandpoors.com. Use the Ratings search box located in the left column.

Primary Credit Analyst:Craig W Parker, Melbourne + 61 3 9631 2073;
craig.parker@spglobal.com
Secondary Contact:Tristan Ong, Melbourne +61 3 9631 2176;
tristan.ong@spglobal.com

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