Scope affirms BB rating on Evex Hospitals, with Stable Outlook

      MONDAY, 05/06/2023 - Scope Ratings GmbH
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      Scope affirms BB rating on Evex Hospitals, with Stable Outlook

      The rating affirmation reflects the company’s resilient operations, cash flow generation potential and ability to grow while maintaining moderate leverage.

      The latest information on the rating, including rating reports and related methodologies, is available at this LINK.

      Rating action

      Scope Ratings GmbH (Scope) has today affirmed its BB/Stable issuer rating on JSC Evex Hospitals (Evex). Scope has also affirmed its BB rating for senior unsecured debt.

      Rating rationale

      The rating affirmation is based on Scope’s expectation of an immediate revenue rebound, which would likely bring the company's cash flow generation to the levels seen in previous years. The post-Covid transition phase and the temporary closure of the Iashvili hospital have had a significant negative impact on the company's top-line development. Although there was some offset from a rebound in demand for elective care, leading to organic growth in certain hospitals, the company’s preliminary figures for 2022 show total revenues have decreased by 9.3% (to GEL 288m) compared to the previous year. Despite operational challenges, the company managed to keep its indebtedness stable at GEL 213m (compared to GEL 217m in 2021). Scope considers 2022’s weak operating performance to be temporary. This view is partially driven by the anticipated sales recovery trends that were observed in the fourth quarter of 2022 and the first quarter of 2023. Furthermore, the implementation of the Diagnosis Related Group system will likely contribute to a more accurate reflection of inflation and other price pressures in the Georgian healthcare sector.

      Evex’ business risk profile (assessed at BB) remains supported by a market-leading position in Georgia’s fragmented referral hospitals market, with a primary aim of increasing service quality through synergies and operating efficiencies (credit-positive ESG factor). The company holds around 17% of the market by number of clinical beds and around 20% of market shares by sales as of YE 2022, although its market position remains constrained by a relatively limited addressable market (less than GEL 2.8bn).

      The abrupt shift from Covid operations to regular care led to a decline in the number of admissions and occupancy rates at hospitals. As a result, hospital staff salaries, which are fixed, created substantial profitability pressures. The post-pandemic transition had a negative impact on EBITDA estimated between GEL 6m-8m. However, the company anticipates it will return to normal operating levels starting in 2023, which is deemed to be already underway based on Q4 2022 trends. The ability to control direct salary rates coupled with operating efficiency based on scale will help the company keeping its EBITDA margin above 20% in the next few years.

      The dynamics of regulatory changes on the market might give Evex an additional competitive advantage in its fragmented market. Scope believes future efforts to additionally reform prices, access and healthcare reimbursement in Georgia’s universal healthcare programme will be incremental rather than dramatic. This has been partially confirmed by the current Diagnosis Related Group model. However, Scope emphasises the substantial risk associated with Evex’ business model’s dependence on government-funded revenue streams, which remains a persistent concern (credit-negative social ESG factor).

      Evex’ financial risk profile (assessed at BB) is supported by high and comfortable EBITDA cash conversion, reflected in overall robust and predictable cash flow generation. Higher-than-expected leverage in 2022 is the result of constrained EBITDA development due to the temporary closure of the Iashvili Hospital and transition effects at hospitals providing Covid treatment. Foreign exchange gains on USD-denominated liabilities decreased overall reported debt by GEL 4m while net debt increased to GEL 193m. Scope-adjusted debt/EBITDA stood at 3.7x at YE 2022 (up by 1.2x YoY).

      Annual expected capex remain in the low double-digit million range (around GEL 20m), which is expected to keep free operating cash flow constrained. While expected capex and dividend payments will limit room to reduce financial debt in the short term, Scope’s rating case incorporates leverage returning below 3.0x in the medium term (2024E: 2.7x; 2025E: 2.1x). Deleveraging is expected to be driven by increasing EBITDA following higher utilisation levels at fully ramped-up Covid-related hospitals (partially confirmed by operating performance in Q4 2022 and Q1 2023), while indebtedness is expected to remain at its current level.

      Scope views Evex’ liquidity as adequate. Although liquidity is expected to weaken in 2023 primarily due to relatively weak operating cash flow and in 2024 when senior unsecured debt of GEL 50m matures, Scope does not foresee any challenges in refinancing. This is due to well-established relationships with local banks and international financial institutions such as the European Bank for Reconstruction and Development. Additionally, it is important to consider the credit quality of the parent company, which would likely provide funding support.

      Scope does not make explicit adjustments for supplementary rating drivers. While it is expected that Georgia Healthcare Group (GHG), the parent company of Evex, will continue to be the main source of dividend cash inflows at the level of investment holding company Georgia Capital PLC (GC), the ultimate parent of GHG and its subsidiaries, Scope believes this reflects the high profitability of GHG as a whole and is consistent with a financial policy aimed at maintaining the current rating. This policy is subordinate to the goal of preserving management’s leverage targets at the subsidiary level. This in turn is supported by lower-than-expected dividend payments in 2022, which can be attributed to Evex’ weak operating performance during that period.

      One or more key drivers of the credit rating action is considered an ESG factor.

      Outlook and rating-change drivers

      The Stable Outlook is based on Scope’s anticipation of a recovery in revenues from underperforming hospitals, coupled with the Scope-adjusted debt/EBITDA ratio remaining below 4.0x. The Outlook also takes into account the successful transition to the Diagnosis Related Group model without operational difficulties, as well as the company's ability to maintain its margins.

      A positive rating action is deemed remote in the foreseeable future given the company’s scope and reach in the emerging market of the Republic of Georgia (rated BB/Stable). If there is a positive rating development in the sovereign, a positive rating action on Evex could be considered if the company improved its diversification while keeping its current financial risk profile.

      A negative rating action could result from a deterioration in credit metrics, as indicated by free operating cash flow of below 5% and a Scope-adjusted debt/EBITDA ratio of above 4x on a sustained basis or a change to a more shareholder-friendly financial policy. Weak financial performance could be triggered by an adverse change in regulations that puts operating profitability under pressure, or it could follow from higher-than-expected dividend payouts.

      Long-term debt rating

      Scope has affirmed the rating on senior unsecured debt at BB including a GEL 50m bond (ISIN GE2700603881-1-02), reflecting Scope’s expectation of an ‘average’ recovery for senior unsecured debt positions in the hypothetical event of a company default. The recovery analysis is based on a hypothetical default scenario in 2025, which assumes outstanding senior unsecured debt up to GEL 50m in addition to GEL 200m in senior secured loans.

      Stress testing & cash flow analysis
      No stress testing was performed. Scope Ratings performed its standard cash flow forecasting for the company.

      The methodology used for these Credit Ratings and Outlook, (General Corporate Rating Methodology, 15 July 2022), is available on
      Information on the meaning of each Credit Rating category, including definitions of default, recoveries, Outlooks and Under Review, can be viewed in ‘Rating Definitions – Credit Ratings, Ancillary and Other Services’, published on Historical default rates of the entities rated by Scope Ratings can be viewed in the Credit Rating performance report at Also refer to the central platform (CEREP) of the European Securities and Markets Authority (ESMA): A comprehensive clarification of Scope Ratings’ definitions of default and Credit Rating notations can be found at Guidance and information on how environmental, social or governance factors (ESG factors) are incorporated into the Credit Rating can be found in the respective sections of the methodologies or guidance documents provided on
      The Outlook indicates the most likely direction of the Credit Ratings if the Credit Ratings were to change within the next 12 to 18 months.

      Solicitation, key sources and quality of information
       The Rated Entity and/or its Related Third Parties participated in the Credit Rating process.
      The following substantially material sources of information were used to prepare the Credit Ratings: public domain, the Rated Entity and Scope Ratings' internal sources.
      Scope Ratings considers the quality of information available to Scope Ratings on the Rated Entity or instrument to be satisfactory. The information and data supporting the Credit Ratings originate from sources Scope Ratings considers to be reliable and accurate. Scope Ratings does not, however, independently verify the reliability and accuracy of the information and data.
      Prior to the issuance of the Credit Rating action, the Rated Entity was given the opportunity to review the Credit Ratings and Outlook and the principal grounds on which the Credit Ratings and Outlook are based. Following that review, the Credit Ratings were not amended before being issued.

      Regulatory disclosures
      These Credit Ratings and Outlook are issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0. The Credit Ratings and Outlook are UK-endorsed.
      Lead analyst: Zurab Zedelashvili, Associate Director
      Person responsible for approval of the Credit Ratings: Sebastian Zank, Managing Director
      The Credit Ratings/Outlook were first released by Scope Ratings on 11 July 2019. The Credit Ratings/Outlook were last updated on 8 June 2022.

      Potential conflicts
      See under Governance & Policies/Regulatory for a list of potential conflicts of interest disclosures related to the issuance of Credit Ratings.

      Conditions of use/exclusion of liability
      © 2023 Scope SE & Co. KGaA and all its subsidiaries including Scope Ratings GmbH, Scope Ratings UK Limited, Scope Fund Analysis GmbH, Scope Investor Services GmbH, and Scope ESG Analysis GmbH (collectively, Scope). All rights reserved. The information and data supporting Scope’s ratings, rating reports, rating opinions and related research and credit opinions originate from sources Scope considers to be reliable and accurate. Scope does not, however, independently verify the reliability and accuracy of the information and data. Scope’s ratings, rating reports, rating opinions, or related research and credit opinions are provided ‘as is’ without any representation or warranty of any kind. In no circumstance shall Scope or its directors, officers, employees and other representatives be liable to any party for any direct, indirect, incidental or other damages, expenses of any kind, or losses arising from any use of Scope’s ratings, rating reports, rating opinions, related research or credit opinions. Ratings and other related credit opinions issued by Scope are, and have to be viewed by any party as, opinions on relative credit risk and not a statement of fact or recommendation to purchase, hold or sell securities. Past performance does not necessarily predict future results. Any report issued by Scope is not a prospectus or similar document related to a debt security or issuing entity. Scope issues credit ratings and related research and opinions with the understanding and expectation that parties using them will assess independently the suitability of each security for investment or transaction purposes. Scope’s credit ratings address relative credit risk, they do not address other risks such as market, liquidity, legal, or volatility. The information and data included herein is protected by copyright and other laws. To reproduce, transmit, transfer, disseminate, translate, resell, or store for subsequent use for any such purpose the information and data contained herein, contact Scope Ratings GmbH at Lennéstraße 5 D-10785 Berlin.

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