Rede D#Or Sao Luiz #BB# Global Scale And #brAA-# National Scale Ratings Outlook Negative Due To Sovereign Cap

Stocks and Financial Services Press Releases Thursday April 20, 2017 09:07
SAO PAULO--20 Apr--S&P Global Ratings

SAO PAULO (S&P Global Ratings) April 19, 2017--S&P Global Ratings said todaythat it affirmed its 'BB' global scale and 'brAA-' national scale corporatecredit ratings on Rede D'Or Sao Luiz S.A. (Rede D'Or). The outlook remainsnegative.

At the same time, we affirmed the 'brAA-' issue-level rating on the company'sexisting senior unsecured fifth debentures issuance. The '4' recovery ratingon these debentures remains unchanged, reflecting our expectation of averagerecovery (40%) in the event of payment default.

The rating affirmation reflects our expectation that Rede D'Or will continuedelivering double-digit revenue growth that, accompanied by increasingprofitability, should bolster credit metrics with debt to EBITDA close to 2xin the next two years. We believe that the company's growth will derive

primarily from new hospitals and expansion of the existing ones, which isdifferent from the past expansion stemming from acquisitions. Despite theopening of new hospitals, we expect Rede D'Or to maintain occupancy rates atabout 80% because it has been able to ramp-up new operations fairly quicklydue to the deficit of hospital beds in Brazil. In addition, the company'sincreasing scale should enable it to dilute operating costs and expenses,resulting in EBITDA margin above 30% during the next few years.

We believe that Rede D'Or will continue benefiting from its leading positionin the private hospital segment and the aging population in Brazil.Additionally, its stronger bargaining power with suppliers and health careplan operators than those of smaller domestic players allows for better prices

and lesser days of receivables. On the other hand, Rede D'Or's business riskprofile is constrained by its operations in Brazil, concentration in a fewhealth care plan operators, as well as its smaller scale than those of largerinternational peers.

In January 2017, the company paid R$1 billion in dividends and interest onshareholders' equity, after ending 2016 with a very high cash position ofR$2.7 billion. We don't expect this amount to be the norm going forwardbecause we expect the company to use internal cash flow generation mainly tofund growth. We believe that Rede D'Or's cash flow from operations (CFO) willbe sufficient to fund the ambitious capital expenditures plan, which is mainlyaimed at internal expansion.

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