RESEARCH UPDATE Primary Credit Analysts: Patrice Cochelin Paris (33) 1-4420-7325 patrice_cochelin@ Secondary Contact: Melvyn Cooke Paris (33) 1-4420-6783 melvyn_cooke@ Additional Contact: Industrial Ratings Europe CorporateFinanceEurope@ Outlook On France-Based Cegedim Revised To Negative On Weaker Earnings, Rising Leverage; BB+ Ratings Affirmed Overview French healthcare software and services firm Cegedim reported a 5% fall in ordinary EBITDA in first-half 2010 and has abandoned its guidance for operating margin improvement in full-year 2010. Leverage has risen significantly since year-end 2009, while Cegedim has continued to make acquisitions. We are revising our outlook on Cegedim to negative from stable and affirming our BB+ long-term ratings. The negative outlook mainly reflects the possibility that we could downgrade Cegedim if leverage at year-end 2010 or June 2011 is higher than at year-end 2009. Rating Action Publication Date Oct. 1, 2010 On Oct. 1, 2010, Standard & Poor s Ratings Services revised its outlook on French healthcare software and services firm Cegedim S.A. to negative from stable. At the same time, we affirmed our BB+ long-term corporate credit rating on Cegedim and the BB+ issue rating on its 300 million unsecured notes due 2015. The 4 recovery rating on these notes remains unchanged, reflecting our expectations of average (30%-50%) recovery for creditors in the event of a payment default.
Rationale The outlook revision follows Cegedim s report of declining earnings and increasing leverage in first-half 2010 and its announced decision to abandon its operating margin guidance for full-year 2010. We believe that Cegedim may report higher adjusted leverage at the end of this year, versus the year-end 2009 level, because of falling earnings pressure and recently announced acquisitions. On June 30, 2010, Cegedim reported gross consolidated debt of 597 million and financial instruments of 11 million. Cegedim s reported EBITDA margin contracted to 18.7% in first-half 2010 from 20.3% in first-half 2009. The revenue trend improved during the six-month period, however, notably in the key customer relationship management (CRM) and strategic data segment, which resulted in overall 8% year-onyear growth in second-quarter 2010, following a 1.5% decline in the first quarter. Total revenues rose by 3.5% in first-half 2010, including 0.4% from organic growth, according to Cegedim. The company s expectation of 5% revenue growth for full-year 2010 implies further growth acceleration to about 6.5% during second-half 2010, according to our calculations. We believe that Cegedim s leverage has increased compared with year-end 2009, and could fail to decline in the near to medium term, contrary to our previous expectations. Cegedim s net debt, as calculated by the company, increased by about 50 million during first-half 2010, including 26 million from acquisitions and 21 million from the revaluation of dollar-denominated net debt, and other financial items, which was only partially offset by modest generation of free operating cash flow (FOCF) after interest and tax and gross capital expenditures of about 20 million during the period. We expect an additional negative impact on net debt during second-half 2010 from acquisitions and dividends, which could be partially offset, in our opinion, by Cegedim s FOCF generation, which has historically been skewed toward the second half. In 2009, we calculate that about 51 million of Cegedim s 71 million annual FOCF were generated during the second half. As a result of lower earnings and higher debt, Cegedim s adjusted debt-to-ebitda ratio, as calculated by Standard & Poor s, rose to about 3.8x at June 30, 2010, compared with about 3.5x at year-end 2010. In addition, the company remains acquisitive. Cegedim has announced that it took control of a small, fast-growing U.S. company in July 2010, a transaction, which we understand involved a capital injection of $13.5 million in July 2010 and could result in payments to shareholders of up $58 million over the next two years. Given our view that these expected payments will be reflected in Cegedim s adjusted debt, as calculated by Standard & Poor s, by year-end 2010, and our understanding that Cegedim paid a 14 million annual dividend during third-quarter 2010, we believe that Cegedim s adjusted debt could decline only modestly by year-end 2010, compared with June 2010. Liquidity We view Cegedim s liquidity as adequate. We believe that if Cegedim maintains a sustained pace of cash-funded acquisitions, leaving our assessment of the company s liquidity as adequate could depend on its timely refinancing of its revolving credit facility, which matures in May 2012. Consolidated cash and investments totaled 143 million on June 30, 2010. Cegedim also had 115 million undrawn on its 165 million revolver. Reported consolidated short-term debt was 143 million on June 30, 2010. This included, according to our calculations, about 86 million from the amortization of its dollar- and euro-denominated senior bank loans and a 50 million revolver draw. We understand that Cegedim used the proceeds from its 300 million notes issue in July 2010 to Standard & Poor s RESEARCH UPDATE 2
permanently prepay drawings under its term loans and revolving credit facility, thereby reducing the annual amortization amount under these loans to about 49 million from 86 million in 2011 and 2012 and restoring full availability under its revolving credit facility. In 2013, term loan amortizations equal about 104 million, at current dollar-euro exchange rates. We understand that the 45 million subordinated loan from Cegedim s parent company does not have mandatory amortization requirements until its final maturity in 2014. Cegedim has stated that it complies with covenants at June 30, 2010, the latest test date. We believe that headroom under the tightest covenant remains adequate (15%-30%), according to our criteria, although we believe that headroom was lower than at the December 2009 calculation, because of higher net debt. We believe that Cegedim s headroom under its single bond covenant was significant (more than 30%), according to our criteria. Recovery analysis The issue rating on Cegedim s 300 million unsecured bonds due 2015 is BB+, in line with the corporate credit rating on Cegedim. The recovery rating on this instrument is 4, reflecting our expectations of average (30%-50%) recovery for creditors in the event of a payment default. The recovery and issue ratings on the bonds reflect the bonds unsecured nature, the existence of priority debt- albeit a moderate amount- ranking ahead of the bonds in a postdefault waterfall scenario, and Cegedim s postdefault exposure to the French insolvency regime, which we view as rather unfavorable for creditors. At the same time, the issue and recovery ratings are supported by our valuation of Cegedim as a going concern, which, according to our estimates, translates into a stressed enterprise value of about 410 million at our simulated point of default in 2013. For our recovery analysis, please see French Health Care Software Company Cegedim BB+ Debt Rating And 4 Recovery Rating Assigned, published July 22, 2010. Outlook The negative outlook reflects the possibility that we could downgrade Cegedim if its financial leverage fails to decline gradually by the end of this year, in line with our rating expectations. In particular, we could lower the ratings if Cegedim s debt-to-ebitda ratio, as calculated by Standard & Poor s, exceeds 3.5x at end-december 2010 or end-june 2011. A downgrade could also result from further downward revisions of the company s operating prospects, including its current guidance for revenue growth of 5% for 2010, or from rising financial leverage, or Cegedim s failure to actively manage its liquidity, notably the refinancing of its revolver, which matures in May 2012. Cegedim s maintenance or strengthening of its business positions could prompt a positive rating action. In our opinion, this could stem from a large conversion of profits into discretionary cash flow after dividends, and sustained, lower financial leverage, including adjusted debt to EBITDA below 3x. Related Criteria And Research Principles Of Corporate And Government Ratings, June 26, 2007 Use Of CreditWatch And Outlooks, Sept. 14, 2009 Criteria Methodology: Business Risk/Financial Risk Matrix Expanded, May 27, 2009 www. 3
Criteria Guidelines For Recovery Ratings On Global Industrials Issuers Speculative-Grade Debt, Aug. 10, 2009 Methodology And Assumptions: Standard & Poor s Standardizes Liquidity Descriptors For Global Corporate Issuers, July 2, 2010 Key Credit Factors: Methodology And Assumptions On Risks In The Global High Technology Industry, Oct. 15, 2009 Ratings List Ratings Affirmed; CreditWatch/Outlook Action To From Cegedim S.A. Corporate Credit Rating BB+/Negative/ BB+/Stable/ Senior Unsecured BB+ BB+ Recovery Rating 4 4 Complete ratings information is available to subscribers of RatingsDirect, Standard & Poor's Webbased credit analysis system, at www.ratingsdirect.com. All ratings affected by this rating action can be found on Standard & Poor's public Web site at www.; under Credit Ratings in the left navigation area, select Find a Rating, then Credit Ratings Search. Standard & Poor s RESEARCH UPDATE 4
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