(Bloomberg) -- Moody’s Ratings downgraded French laboratories firm Cerba, warning its capital structure risks becoming unsustainable without an increase in earnings and cash flow.
Cerba’s financial and credit profile has “significantly weakened” with €4.7 billion ($5.2 billion) of adjusted debt as of June 30 June, the ratings agency commented in a note published on Tuesday. The company spent more than €3 billion buying other European labs between 2020 and 2022.
“While these acquisitions offer potential for growth and market expansion, they also introduce significant execution risk, particularly in terms of integrating these new entities into the larger corporate structure and realizing the anticipated cost synergies,” Moody’s analysts wrote.
The ratings firm cut the parent company’s rating one notch to Caa1, seven steps into high-yield territory. It also downgraded Cerba’s senior secured loans and notes — as well as its revolving credit facility — two notches to Caa1, and lowered its unsecured notes one notch to Caa3.
Cerba’s €525 million unsecured notes due in 2029 fell almost 4 cents on the euro to around 63 cents on Tuesday following the downgrade, according to data compiled by Bloomberg.
Private equity firm EQT Partners took a controlling stake in the company in 2021 from Partners Group through a leverage buyout, when the business was booming on the back of tests related to the Covid-19 pandemic. Canada’s Public Sector Pension Investment Board, which was already an investor, kept a minority stake, as did the company management.
The laboratories sector in Europe faces significant market risk due to the heavily regulated nature of the industry. Moody’s analysts cited a recent move by French officials to cut prices as part of a three-year agreement aiming at balancing the increased volume of services with the budget. In response, Cerba has launched a comprehensive cost-cutting program aiming at improving profitability.
“Should the company fail to achieve cost savings and realise synergies promptly, these credit metrics could deteriorate,” Moody’s analysts wrote in the report.
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