Scope goes to the upper limit

The Berlin rating agency Scope has affirmed its BB issuer rating and BB rating for senior unsecured debt on JSC Evex Hospitals (Evex) with a Stable Outlook.

The affirmation is based on several factors:

• Resilient Operations: Scope expects an immediate revenue rebound for Evex, which would bring its cash flow generation back to previous levels. While the company faced challenges due to the post-Covid transition phase and the temporary closure of the Iashvili hospital, it managed to maintain stable indebtedness and showed signs of sales recovery in late 2022 and early 2023.
• Ability to Grow: Evex holds a market-leading position in Georgia’s fragmented referral hospitals market, with a focus on increasing service quality through synergies and operating efficiencies. Despite a relatively limited addressable market, the company has shown organic growth in certain hospitals.
• Moderate Leverage: Evex’s financial risk profile is supported by high and comfortable EBITDA cash conversion, robust cash flow generation, and manageable leverage. While the company experienced higher-than-expected leverage in 2022 due to temporary factors, Scope expects leverage to return below 3.0x in the medium term.
• Adequate Liquidity: Evex’s liquidity is considered adequate, although it is expected to weaken in 2023 and 2024. However, Scope does not foresee any challenges in refinancing due to the company’s established relationships with local banks and international financial institutions.

The Stable Outlook reflects Scope’s expectation of a revenue recovery, the company’s ability to maintain its margins, and the successful transition to the Diagnosis Related Group model without operational difficulties. A positive rating action is deemed remote in the near future, while a negative rating action could result from deteriorating credit metrics or a change to a more shareholder-friendly financial policy.

Scope has also affirmed the rating on Evex’s senior unsecured debt, reflecting an expectation of an average recovery for senior unsecured debt in the event of a hypothetical company default. The recovery analysis assumes outstanding senior unsecured debt and senior secured loans.

While the rating on Evex Hospitals being on par with the sovereign rating of Georgia may suggest positive attributes, there are several criticisms that can be raised regarding such a high rating:

In summary, assigning the same rating to Evex Hospitals as the sovereign rating raises concerns about the adequacy of the rating methodology and the assessment of risks specific to the company. Considering the country-specific risks, limited market size, weak operating performance, and the potential impact of economic and regulatory factors, it is questionable whether the rating should be as high as the sovereign rating.