Fortrea’s credit rating downgraded by Fitch due to weakening profile

Investing.com -- Fitch Ratings has downgraded the Long-Term Issuer Default Rating (IDR) of Fortrea Holdings, Inc. to ’B’ from ’BB-’, and its senior secured ratings to ’B+’ from ’BB+’ on Monday, March 17, 2025. The downgrade is attributed to Fortrea’s weakening credit profile and reduced near-term growth prospects. The rating outlook remains negative.

The downgrade comes despite Fortrea’s efforts to reduce its debt in 2024. Fitch anticipates that the company’s EBITDA leverage will likely stay within the 6.0x to 8.0x range in the near future. The negative outlook reflects the possibility of further downgrades if Fortrea’s growth remains limited or delayed due to ongoing market volatilities or unsuccessful business strategies.

Fitch predicts a 7.3% decline in Fortrea’s revenues in 2025 and expects revenue growth to return in 2026 within the 3.0% to 4.0% range. The company’s inconsistent revenue growth and uncertain operating environment have led to a reduction in Fitch’s previous revenue expectation of $3.2 billion by 2027.

Despite the challenges, Fitch believes that Fortrea will be able to navigate through near-term challenges with sufficient liquidity. However, strategic failures could affect its ability to compete with larger, better-capitalized peers and hinder its debt reduction efforts.

Fitch also expects Fortrea’s EBITDA margins to decline by 30 basis points in 2025 from 7.4% in 2024 due to higher operating costs as a standalone company and a lower contribution from higher-margin post-spin awards. Over the forecast period, Fitch assumes margins will gradually expand but likely sustain in the high-single-digit range.

Fitch anticipates that Fortrea’s EBITDA leverage will rise to 8.0x in 2025 and sustain in the 6.0x to 7.0x range in 2026 and 2027. Despite repaying $483 million of outstanding debt in 2024, Fortrea fully drew on its receivables securitization facility, which Fitch treats as senior debt in the total debt calculation, to provide liquidity.

Fortrea’s capital allocation priorities remain unchanged, with the company focusing on targeted investments to drive organic growth. Fitch expects Fortrea to use a combination of cash on hand and milestone payments from the sale of its Enabling Services business to redeem $76 million of the 2030 senior secured notes in 2025.

Fitch anticipates continued volatility in the CRO industry and expects end-market demand to remain volatile. Biopharmaceutical companies will continue to reprioritize pipeline assets and remain cautious with spending to navigate uncertainties stemming from government policies.

Fitch’s ’B’ IDR considers Fortrea’s competitive position as a global CRO that offers a broad range of clinical development solutions. However, these strengths are currently offset by its elevated credit risks and weakening cash flow profile.

Fitch estimates an enterprise value (EV) on a going concern basis of approximately $850 million. The estimated EV reflects an estimated EBITDA of approximately $195 million, reflecting Fitch’s view that EBITDA at this level is likely to trigger a default or restructuring amid significant refinancing risk from negative cash flow generation and high leverage.

Fortrea’s liquidity is supported by $119 million of cash on hand and an undrawn revolving facility of $450 million as of Dec. 31, 2024. Fitch forecasts negative CFO in 2025 but expects CFO to turn positive and gradually improve to $90 million in 2027. Over the forecast period, Fitch expects Fortrea to have sufficient liquidity to cover working capital requirements, capex, and organic investments. However, adverse operating conditions will result in reliance on the revolving facility to meet short-term liquidity needs.

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