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Investing.com -- Credit rating agency Fitch Ratings has revised the outlook for Ephios Subco 3 S.a.r.l, also known as Synlab, to stable from positive. Additionally, Fitch has confirmed Synlab’s Long-Term Issuer Default Rating (IDR) at ’B’. The ratings agency has also maintained its senior secured debt rating at ’B+’ and the senior unsecured rating of Synlab Bondco PLC at ’CCC+’. The Recovery Ratings for the senior secured debt and unsecured debt are ’RR3’ and ’RR6’, respectively. Following this revision, Fitch has removed Synlab’s ratings from Under Criteria Observation (UCO) which was related to its updated Lease Criteria.
The outlook revision is based on Fitch’s expectation of continued lower EBITDA margins in 2025-2026, a trend that has been ongoing since 2023. This is expected to result in EBITDAR leverage remaining above Fitch’s 5.5x positive sensitivity and slightly negative free cash flow (FCF) until 2027.
The high leverage is due to an increase in debt, with EBITDAR leverage increasing to 7.2x (6.0x net) from 5.0x in 2023. This was due to a take-private transaction led by Cinven. However, Fitch expects EBITDAR leverage to decrease to 6.7x in 2025, despite the anticipated purchase of the remaining minority shareholders, including Elliot, for around EUR300 million.
Fitch anticipates a gradual decrease in Synlab’s EBITDAR leverage over 2026-2028, supported by a modest EBITDA margin recovery and low-to-mid single digit organic growth. However, the EBITDAR leverage is expected to remain above Fitch’s 5.5x positive sensitivity in 2026 and potentially also in 2027. On a positive note, the risk of re-leveraging has diminished, along with the uncertainty over the premium that Cinven will have to pay to fully privatize Synlab.
The application of new criteria on leases dating from 2024 has resulted in a reduction in Fitch’s lease-adjusted debt of around EUR250 million. Without a leverage target for Synlab, further deleveraging will depend on the financial policy taken by Cinven, including potential divestments, alongside operating performance improvements.
In 2024, EBITDA margins declined to 7.6% (9% pro-forma for a cyberattack and recent disposals), from 9.4% in 2023, due to a cyberattack and temporary reimbursement pressure in France. Fitch forecasts a gradual margin recovery to 10% in 2025, 11% in 2026 and towards 12.5% in 2028, supported by cost management, easing inflation, active portfolio management and resilient organic growth in the low-to-mid single digits.
Fitch forecasts slightly negative FCF margins over 2025-2026, driven by high cash interest and soft yet gradually improving profit margins. Stronger FCF generation would depend on contained capex and margin improvement beyond the rating case.
Synlab operates in multiple regulated healthcare markets, which are subject to different pricing and reimbursement pressures. This geographical diversification mitigates the effect of unexpected reimbursement changes in an individual country. Synlab’s largest markets are France, Germany, Italy and the UK, which together represent around two thirds of sales. It is also present in Latin America and across central, north and eastern Europe.
Compared with its peers, Synlab is larger and much more geographically diversified than its French medical diagnostic testing peers Laboratoire Eimer Selas and Inovie Group. However, its EBITDA margins are lower due to its geographic mix and a greater focus on lower-margin B2B clients.
Fitch’s rating case assumptions include organic sales growth of 2.5% for 2025-2028, disposal proceeds of EUR220 million in 2025 and EUR150 million in 2026, and a gradual margin recovery to 10% in 2025, improving towards 12.5% by 2028.
The recovery analysis assumes that Synlab would be reorganised as a going concern in bankruptcy rather than liquidated, given its asset-light operations. On completion of the takeover and refinancing, Fitch estimates a distressed EBITDA of around EUR225 million. The distressed enterprise value/EBITDA of 6.0x reflects Synlab’s geographic breadth and scale as a leader in the European lab-testing market and its cash-generative operations.
The allocation of value in the liability waterfall results in a Recovery Rating ’RR3’ for the senior secured debt (EUR1,450 million) and the revolving credit facility (EUR500 million), indicating a ’B+’ instrument rating.
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