Fitch downgrades Ramsay’s outlook from stable to negative following KKR’s $20bn takeover bid

Higher-than-expected costs from Covid-19 are weighing on Ramsay Health Care, as cashed-up Wall Street raider KKR circles the company.

Ramsay nurses Elise Jenkins and Renee Davis relocated to Dubbo to help with the Covid effort in regional NSW. PIC: Nat Salloum

Fitch Ratings has downgraded the outlook of private equity takeover target, Ramsay Health Care, from stable to negative, as the hospital group’s debt levels surge from the Omicron outbreak.

Fitch revised Ramsay’s long-term issuer default rating — which it affirmed at BBB for the time being — a week after KKR lobbed a $20bn takeover for the group, Australia’s biggest private hospital operator.

It comes as government-enforced elective surgery bans have so far wiped at least $155m off Ramsay’s earnings.

Meanwhile after advancing more than 30 per cent following KKR’s bid last week, Ramsay shares declined 1.8 per cent to $82.88 on Tuesday. This compared with a 2.1 per cent fall across the broader share market.

“Fitch believes that higher-than-expected costs due to the outbreak of the Omicron variant of Covid-19 and ongoing ramp-up issues facing the healthcare sector will delay the return of Ramsay’s leverage (total adjusted debt/EBITDAR) to below 3.3x, the level at which we may take negative rating action,” the ratings agency said.

It said while Ramsay has “options” to aid deleveraging via cost reduction and other initiatives, including the sale of its Asian business Ramsay Sime Darby, “there are execution risks associated with these”.

“In addition, the completion of the proposed sale of its Ramsay Sime Darby joint venture, the proceeds of which could be used to reduce debt, remains under negotiation.

“Nevertheless, the successful execution of one or more of these measures would allow Ramsay to deleverage in line with our initial expectations, and we would likely revise the Outlook to Stable upon their execution.

“Fitch now expects Ramsay’s leverage to improve to 3.3x, the level we could consider taking negative rating action, by FY24, after peaking in FY22 at 4.7x. We previously expected Ramsay to return its leverage metrics to within the guidelines for its rating by FYE23.”

Fitch said Ramsay faced several short-term challenges — even without government surgery bans, as more people delay elective procedures.

“Fitch expects that Ramsay will continue to navigate challenges, including high cancellation levels and ongoing reluctance of clinicians and patients to enter hospitals, over the short term.

“However, we believe that demand for private hospital services in Australia and the UK will return over the medium term, driven by an ageing and growing population, longer life expectancies, a rise in chronic diseases and improving medical technology. We also expect rising demand for mental health services as governments prioritise such issues in communities.”

Fitch said it will review Ramsay’s credit profile should KKR’s takeover proposal proceed. KKR has assembled a consortium for the bid of $88 a share, including the nurse industry superannuation fund HESTA and international pension funds.

But Fitch warned a successful takeover could still lead to negative ratings action.

“Although KKR‘s intentions are not known, private-equity owners typically use more aggressive capital structures that could lead to negative rating action.”

Ramsay shares closed down 1.8 per cent on Tuesday, at $82.88 each.