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Investing.com -- S&P Global Ratings has downgraded North Carolina-based contract research organization Fortrea Holdings Inc. to ’B-’ from ’B+’ due to persistently high leverage and negative cash flow. The ratings agency removed all ratings from CreditWatch, where they had been placed with negative implications on March 6, 2025. The recovery rating of ’3’ remains unchanged, and the outlook is stable.
The downgrade is a result of S&P Global Ratings’ view that Fortrea’s credit metrics will remain weak for the next few years. Despite expectations for improved EBITDA, EBITDA margins, and free cash flow, the credit metrics are anticipated to fall well below previous expectations. This downgrade comes in the wake of Fortrea facing more significant challenges than anticipated in becoming a standalone entity following its spin-off from Labcorp.
Initial S&P Global Ratings-adjusted EBITDA margins for 2024-2025 were expected to be 12%-13%. However, current projections indicate they will be less than 6% for fiscal 2025, with a slight improvement to about 8% in 2026. Cash flow has not met previous expectations, and leverage has remained high. Gradual improvements in credit metrics are expected as business optimization efforts are implemented and transition support agreement costs are phased out.
The challenges faced by Fortrea have led to a lowered assessment of the company’s business risk, from fair to weak. The S&P Global Ratings-adjusted debt measure now reflects gross debt instead of net debt.
Despite its struggles, Fortrea has successfully exited almost all of its transition support agreements and identified significant cost-saving opportunities. The company targets annual gross cost reductions of approximately $150 million, although restructuring costs have negatively impacted cash flow and S&P Global Ratings-adjusted EBITDA.
Cost savings are expected to contribute to margin improvement after this year, despite being partly offset by increased worker incentive pay. The company’s profitability is expected to continue to lag behind peers for a few more years, as older, less profitable contracts gradually decline in proportion to the company’s revenues. By late 2026, the majority of Fortrea’s business is expected to be tied to more profitable post-spin projects.
Despite industry headwinds, Fortrea is expected to maintain its market position. The company has sustained bookings comparable or favorable to its larger public peers over the last three quarters, which is expected to result in low- to mid-single-digit percent revenue growth in 2026.
The stable outlook reflects the expectation that Fortrea will generate positive free cash flow for the remainder of 2025 and in subsequent years, gradually improving EBITDA margins and reducing leverage. The rating could be lowered if cash flow deficits persist, leading to an unsustainable capital structure or strained liquidity. Conversely, the rating could be raised if Fortrea sustains reported free operating cash flow (FOCF) above 2% of its S&P Global Ratings-adjusted debt.
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