Assistance Publique-Hôpitaux de Marseille
Key Rating Drivers
Rating Derivation Summary: Fitch Ratings views Assistance-Publique Hôpitaux de Marseille (AP-HM) as a government-related entity (GRE) of the French state (AA/Negative) and rates it one notch below the sovereign. This reflects a score of 35 points under our GRE criteria. The Standalone Credit Profile (SCP) is ‘bb’ and does not affect the Issuer Default Rating (IDR).
Status, Ownership and Control – ‘Very Strong’: AP-HM has the special status of etablissement public administratif (EPA), like other French public hospitals. In case of dissolution, its assets and liabilities would be transferred to the French state or to another public entity designated by the state. The French state exercises tight control over AP-HM’s finances and activities, notably through Provence-Alpes-Cote d’Azur’s regional health agency (ARS).
Support Track Record – ‘Very Strong’: The state exercises strong regulatory influence on AP- HM. The hospital is undergoing a recovery plan agreed with the ARS to improve its financial position. Its new loans and financial trajectory are therefore subject to the ARS’s approval.
AP-HM can also receive liquidity support from the French state, through the ARS, in case of financial distress. It will also benefit from the strong measures put in place by the French state this year to support the hospitals during the coronavirus pandemic, and the plan to cover a third of the sector’s debt service in the coming years.
Socio-Political Implications of Default – ‘Strong’: AP-HM is the main hospital in the Region of Provence-Alpes-Cote d’Azur (AA-/Stable) and is the third-largest hospital group in France by number of stays after Assistance Publique-Hopitaux de Paris (AA/Negative) and the Hospices Civils de Lyon. AP-HM also has public missions in research and education.
A default by AP-HM would have significant political consequences for the state, in Fitch’s opinion. Fitch views the pandemic crisis triggered by the coronavirus as confirming the importance of public support to the healthcare sector.
Financial Implications of Default – ‘Moderate’: AP-HM is a regular issuer on the financial market. Its debt is mainly made up of bank loans, bonds representing 16% of the total (EUR163 million at end-2019). Fitch believes there would be a risk of contagion for other French public hospitals and other French-state related GREs if AP-HM were to default.
SCP Revised to ‘bb’: Fitch revised AP-HM’s SCP to ‘bb’ from ‘bb-’ thanks to the expected positive impact of the debt relief and a leverage ratio (net adjusted debt/EBITDA) that Fitch expects below 10x in its rating case scenario (2019: 9.9x). The coronavirus pandemic will be negative for the hospitals’ financial performance in 2020, leading to lower revenue and extra costs. However, the strong support measures put in place by the French state this year, and the plan to cover part of the debt service will offset most of the downside.
ESG Considerations: ESG issues have a minimal impact on AP-HM’s ratings, as reflected in a score of ‘3’.
Rating Sensitivities
Change in Sovereign Rating: A sovereign rating action would be reflected in AP-HM’s ratings.
Weaker Support Factors: A downgrade could result from a weakening of the links between the French state and AP-HM, or a weakening of AP-HM’s importance for the French state, which Fitch views as unlikely at the moment.
Ratings
Foreign Currency
Long-Term IDR AA-
Short-Term IDR F1+
Local Currency
Long-Term IDR AA-
Short-Term IDR F1+
Outlooks
Long-Term Foreign-Currency IDR Negative Long-Term Local-Currency IDR Negative AP-HM is a university hospital centre with 3,400 beds located in the City of Marseille (A+/Stable). AP-HM is also at the head of the Department of Bouches du Rhone’s (AA-/
Stable) hospitals grouping, which includes 12 other hospitals.
Financial Data
Assistance Publique-Hôpitaux de Marseille
(EURm) 2019 2024rc
Net adjusted debt/EBITDA (x) 9.9 7.3 EBITDA/gross interest (x) 2.7 3.4 Operating revenue 1,383 1,457
EBITDA 102 97
Net adjusted debt 1,010 706
Total assets 1,153 --
rc: Fitch’s rating-case scenario Source: Fitch Ratings, AP-HM
Applicable Criteria
Government-Related Entities Rating Criteria (September 2020)
Public-Sector, Revenue-Supported Rating Criteria (March 2020)
Related Research
French Public Hospitals: Rating Approach Driven by State Support (April 2020) What Investors Want to Know: French Government’s Plan Is Credit-Positive for French Public Hospitals (November 2019)
Analysts
Nicolas Miloikovitch, CFA +33 1 44 29 91 89
nicolas.miloikovitch@fitchratings.com
Pierre Charpentier +33 1 44 29 91 45
pierre.charpentier@fitchratings.com
Rating Synopsis
Fitch views AP-HM as a GRE of the state of France and assigns a score of 35 to the hospital, according to our GRE criteria. The rating factors ‘Status, Ownership and Control’ and ‘Support Track Record and Expectations’ are assessed as ‘Very Strong’, while ‘Socio-Political Implications of Default’ is assessed as ‘Strong’ and ‘Financial Implications of Default’ as
‘Moderate’.
The score of 35 leads to the application of a top-down approach with a one-notch differential with the sovereign’s. AP-HM’s SCP is ‘bb’ and does not affect AP-HM’s IDR.
Issuer Profile
AP-HM is one of the 32 regional university hospital centres in France. It is the third-largest hospital group in France behind the Assistance Publique-Hopitaux de Paris and the Hospices Civils de Lyon, and it is the largest hospital centre in the region Provence-Alpes-Cote d’Azur.
At end-2019 the hospitals had 3,400 beds and 12,000 employees.
AP-HM’s activity is spread over five sites in the city of Marseille: the Timone (for children and adults), the Conception, the Hopital Nord and the hospitals Sainte Marguerite and Salvator.
Assessment of the Support – GRE
AP-HM – Assessment of the Support
Status, ownership, and control
Support, track record
Socio-political implications of default
Financial implications of
default GRE score
Very strong Very strong Strong Moderate 35
Source: Fitch Ratings
Status, Ownership and Control: Very Strong
AP-HM has the special status of EPA, like other French public hospitals. In case of dissolution, AP-HM’s assets and liabilities would be transferred to the French state or to another public entity designated by the state.
The French state exercises tight control over AP-HM’s finances and activities through the ARS of Provence-Alpes-Cote d’Azur. Hospitals’ CEOs are appointed and dismissed by the state: AP-
GRE Rating Derivation Summary
Standalone Credit Profile (SCP) Derivation Sponsor IDR GRE SCP GRE IDR
Status, Ownership and Control 10 Revenue Defensibility Midrange AAA aaa AAA
Support Track Record 10 Operating Risk Midrange AA+ aa+ AA+
Socio-Political Implications of GRE Default 10 Leverage Ratio (Rating Case Scenario) 7.3 AA aa AA
Financial Implications of GRE Default 5 Qualitative Factors Adjustments -- AA- aa- AA-
GRE Support Score 35 GRE SCP bb A+ a+ A+
Score - Notching Guideline Table 35-42.5 Distance - Notching Guideline Table >4 A a A
A- a- A-
BBB+ bbb+ BBB+
Summary BBB bbb BBB
Sponsor IDR AA BBB- bbb- BBB-
Notching Guideline Table GRE SCP bb BB+ bb+ BB+
Distance \ Score >=45 35-42.5 27.5-32.5 20-25 15-17.5 12.5 <=10 Distance Sponsor IDR vs GRE SCP 9 BB bb BB
= or above Capped Capped Capped Capped Capped Capped Capped GRE Support Score 35 BB- bb- BB-
1,2,3 = = = - 1 + 1 + 1 SCP Notching Approach Top down -1 B+ b+ B+
4 = - 1 - 1 - 2 + 1 + 1 SCP GRE Suggested IDR AA- B b B
>4 = - 1 - 2 - 3 +2/+3 + 1 SCP Single Equalisation Factor No B- b- B-
Stylized Notching Guideline Table: refer to GRE criteria for details GRE IDR AA- CCC/CC/C ccc/cc/c CCC/CC/C
Source: Fitch Ratings
GRE Key Rating Drivers and Support Score
Very Strong Very Strong Strong Moderate
0 10
20 30
40 50
60
GRE Support Score (max score = 60)
Rating History
Date
Long-Term Foreign- Currency IDR
Long-Term Local-Currency IDR
6 Feb 20 AA- AA-
Source: Fitch Ratings
HM’s current CEO, Jean-Olivier Arnaud, was appointed by a state decree dated 29 April 2017.
The hospital is also subject to the control of the French state’s supervisory bodies, such as the Regional Court of Accounts.
The most recent report by the Regional Court of Accounts was published in June 2018 and covers 2010-2015.
The day-to-day control of hospitals is carried out through the ARS, created in 2009 and directly monitored by the Ministry of Health. They are in charge of monitoring the financial situation of hospitals and issuing authorizations for them to carry out certain medical activities.
The state also exercises its control through the annual vote by parliament on the National Ceiling for Health Insurance Expenditures (ONDAM), which limits the sector’s total expenses.
AP-HM is also subject to regular controls by the state through the Interministerial Committee on the Performance and Modernisation of Healthcare (COPERMO, which in 2021 will become the Comite de l’Investissement en Sante) on its financial trajectory and the respect of its commitments, to annual controls through the Investment Project Review (whose outcome conditions the payment of dedicated subsidies) and to the Project Performance Review.
Support Track Record: Very Strong
The French state exercises strong regulatory influence on AP-HM. The latter is implementing a recovery plan agreed with the ARS to improve its financial position. As part of this process, its new loans and financial trajectory are subject to the ARS’s approval. The ARS gave AP-HM’s budget for 2020 a qualified approval in its letter dated 17 February 2020.
AP-HM has agreed with the ARS four different recovery plans since 2009 due to its weak financial profile. The most recent report from the Regional Court of Accounts noted that these plans have not enabled AP-HM’s financial profile to improve. The current recovery plan was signed in February 2020 and approved by the COPERMO.
French public hospitals can also receive liquidity support from the French state, through the ARS, in case of financial distress. AP-HM received EUR20 million a year of liquidity support in 2018, 2019 and 2020. ARS monitors AP-HM’s liquidity through a dedicated control mechanism (“veille active du suivi de la trésorerie”). There would be no legal or regulatory restriction on government support in such a scenario.
ARS is also responsible for checking whether the hospital complies with three prudential ratios:
• Financial independence ratio (debt / [equity + debt], warning sign above 50%)
• Net debt/cash flow from operations ratio (warning sign above 10 years)
• Debt/total revenue ratio (warning sign above 30%)
If at least two of these ratios are breached, ARS approval is required to borrow. At end-2019 AP-HM breached all three ratios, making new borrowings subject to the ARS’ approval.
In Fitch’s view, the law of 16 July 1980 makes the French state liable for the debt of its EPAs, including French public hospitals. We do not see the law as tantamount to a guarantee1, but consider it as another form of support for public hospitals.
The state’s plan announced in November 2019 to support French public hospitals also confirms our assessment. According to this plan, the French state will cover through subsidies the servicing of a third of public hospitals’ debt (EUR10 billion of capital and EUR3 billion of cumulative interest). The subsidies will be transferred by the social security and financed by Caisse d'Amortissement de la Dette Sociale (AA/Negative). The measures aim to provide hospitals with financial leeway to boost their capex programme, to improve employees’
conditions, and to help over-indebted hospitals.
The national emergency bill passed in March 2020, in response to the coronavirus crisis, is further evidence of state support. The French state will ensure the hospitals have revenue
1 What Investors Want to Know: The Status of EPs Is not Tantamount to a Guarantee (February 2018)
equivalent to that of the previous year for most medical activities, to compensate for any revenue drop linked to the crisis, especially the postponement of scheduled surgeries. It will also provide hospitals with an additional EUR8 billion to help them purchase necessary equipment and provide support to staff.
Socio-Political Implications of Default: Strong
In Fitch’s view, a financial default would not necessarily interrupt the provision of service as a hospital could continue to perform its operations. However, a default would have medium- term consequences as it would considerably alter the ability of a hospital to access funding and therefore to pursue essential capital expenditure. The assessment of this criterion depends on the missions performed by the hospital and on its market share within its territory.
AP-HM is a university hospital, which means it has also research and education roles alongside its medical one. AP-HM has a solid reputation and ranks among the best hospitals in France for some medical specialties, such as the treatment of bone cancer for children, epilepsy for adults and lung cancer.
AP-HM is the main hospital centre in region Provence-Alpes-Cote d’Azur, and is the third largest in France. In its catchment area2, AP-HM represents about 20% of hospital stays according to the Ministry of Health’s figures. AP-HM has 3,400 beds and about 12,000 employees. Its main competitors are private hospitals: the hospital Saint Joseph and the European Hospital.
AP-HM is also at the head of the public hospitals grouping for the Department of Bouches-du- Rhone, which structures the public health policy for the department. In particular it is responsible for planning and for the public hospitals’ buying strategy. As the largest public hospital on the department’s territory, AP-HM is where the most complex cases are referred to, which in Fitch’s view reinforces its strategic importance.
Fitch also considers the pandemic crisis triggered by the coronavirus to confirm the importance of public support for the healthcare sector in France. After the debt relief announced in late 2019, the state confirmed general salary raises for the sector in 2020 and affirmed its willingness to modernise the country’s healthcare infrastructures.
Financial Implications of Default: Moderate
AP-HM’s adjusted debt was EUR1.0 billion at end-2019, including EUR163 million of bonds and EUR69 million of debt related to a public-private partnership. AP-HM is also part of the EUR228 million joint bond issue by several French hospitals, maturing in 2023 (French Public Hospitals 3, ‘A+’).
Fitch considers that the financial implications for the state of a default by AP-HM would be limited, as for other French hospitals. However, Fitch considers that there would be a risk of contagion not only for other French public hospitals, but also for the cost of funding of other large French GREs if AP-HM were to default on its market debt.
Overall GRE Assessment
The assessment of AP-HM’s rating factors lead to a score of 35 under our GRE criteria.
2 “Zone de recrutement” defined by the ministry as the municipalities representing 80% of the patients who have been to this hospital.
Standalone Credit Profile Assessment
AP-HM’s SCP is ‘bb’, which reflects a ‘Midrange’ assessment of both ‘Revenue Defensibility’
and ‘Operating Risk’ rating factors, as for other French public hospitals.
It also reflects a leverage ratio (net debt/EBITDA) that Fitch expects to be below 10x in the medium term in its rating case scenario, and a coverage ratio (EBITDA/debt service) close to 1x.
The financial analysis is based on the hospital’s annual accounts. The latest available annual accounts refer to 2019 and were received an unqualified opinion by Deloitte.
Summary
Revenue
defensibility Operating risk
Leverage ratio (x), 2024rc
Negative impact of liquidity profile
Asymmetric
risks SCP
Midrange Midrange 7.3 No No bb
rc: Fitch’s rating-case scenario Source: Fitch Ratings
Revenue Defensibility: Midrange
Attributes related to demand are ‘Strong’ as Fitch considers that the risk that revenue contracts in a structural way is limited, whereas pricing characteristics are ‘Weak’ as French hospitals cannot increase their tariffs if needed.
The impact of the pandemic on AP-HM’s overall revenue should be rather neutral, although the activity mix materially changed with many non-vital interventions rescheduled to make room for Covid-19 patients. The government, through the ministerial ruling dated 6 May 2020, has announced that it will compensate the revenue loss of public hospitals between 1 March 2020 and 31 December 2020. The compensation is based on 2019 revenue with a 0.2%
increase.
A Solid Demand
AP-HM’s patient base is diversified and is unlikely to shrink in an economic slowdown. The steady increase expected for Bouches-du-Rhone’s population (+0.5% a year in 2012-2017) should have a positive impact on the hospital’s demand base over the medium term.
Pricing characteristics are ‘Weak’ due to the rigidity of AP-HM’s revenue from the social security system. The hospital cannot increase the tariffs on its own, as they are decided every year by parliament. Like all French hospitals, AP-HM has been exposed to the reduction in hospital tariffs introduced between 2010 and 2018 to slow the increase in medical expenses.
Tariffs increased in 2019 and 2020 for the first time in 10 years. We also expect them to
-3 -2 -1 0 1 2 3 4 5
2014 2015 2016 2017 2018 2019
ONDAM Operat ing revenue St ays in cat chment area
Source: Fit ch Rat ings, ATIH, AP-HM
Annual Change in the Number of Stays
(%)
Revenue Breakdown (Excl. Non Cash Items), 2019
(EURm) (%) Medical activities 1,215 89 Transfers and grants from
public sector
64 5
Other 82 6
Operating revenue 1,361 100
Memo
Financial revenue 10 -
Capital revenue 12 -
Sales of assets 45 -
Source: Fitch Ratings, AP-HM
continue increasing in the coming years, which should have a positive impact on AP-HM’s operating income.3
A Competitive Environment
AP-HM is located in a territory where competitive intensity is very high. This is particularly reflected by its market share in its catchment area, which is below 20% (more than 30% for Assistance Publique-Hopitaux de Paris and more than 20% for Hospice Civils de Lyon, the two largest public hospitals in France).
AP-HM is leader in its catchment area for medicine, with a market share of 35% (23% for the two largest private hospitals combined), and in obstetrics with a market share of 38%, but has a lower market share in surgery, below 18%.
Fewer than 4% of Bouche-du-Rhone’s residents went to another department for treatment, as compared with 45% of the residents of the Department of Alpes-de-Haute-Provence for example. In Fitch’s view this reflects the diversity and the quality of healthcare provided in the department and, indirectly by AP-HM, which is central for this territory’s healthcare system.
AP-HM’s main asset is that, as a large university hospital, it covers almost all medical specialties and activities (proximity and referral). AP-HM achieves solid scores in several public hospital rankings on quality of the care .
AP-HM’s main competitors are two private not-for-profit hospitals (Saint Joseph and the European Hospital). The latter is brand new, having opened in 2013. In contrast, AP-HM has a dilapidation rate (average share of assets already amortised) for buildings of 51% and for equipment of 75%, according to Hospi Diag.
Difficulties in Optimising Revenue
AP-HM’s operating revenue reached EUR1,361 million at end-2019 and is composed as follows:
• 42% tariffs linked to activity: each medical act is codified and reimbursed accordingly by the social security system, which is a sovereign risk.
• 43% other public subsidies to finance its research and education missions and cover its central costs. They also include the extraordinary liquidity subsidies received by AP- HM (EUR20 million in 2018 and 2019).
• 15% other operating income, including the sale of pharmaceutical products and revenue from stays not covered by the social security.
Overall, more than 80% of AP-HM’s revenue comes from the state through the ARS and the social security system, which in Fitch’s view considerably reduces counterparty risk.
AP-HM’s operating income increased by 2.3% a year on average in 2015-2019, driven mostly by public subsidies and by a material 3.5% increase in 2019. Public subsidies to cover its public service mission have been increasing by 5% a year, which highlights the public sector support to the hospital.
The 2.3% increase is slightly lower than the ONDAM (2.7% in 2019), which underlines the hospital’s difficulties in optimising its revenue. The Regional Court of Accounts, in its 2018 report, reiterated the hospital’s weakness regarding the billing process, leading to a high risk of unpaid-for medical procedures.
In 2019, Fitch estimates that AP-HM received about EUR1,800 per stay of tariffs linked to activities, 10% below the EUR2,000 median for French hospitals rated by Fitch. Other revenue and public subsidies did not reduce the gap, which reached 11% (EUR4,300 of operating income for AP-HM against a median of EUR4,900).
Fitch considers that the hospital’s capacity to optimise its revenue will be key for the improvement of its financial profile
3 What Investors Want to Know: French Government’s Plan is Credit-Positive for French Public Hospitals, November 2019
Operating Risk: Midrange
Our assessment reflects both the limited volatility of the main cost drivers, and limited flexibility to adjust them.
The impact of the pandemic on AP-HM’s expenses will be negative, with a surge in staff costs (estimated by Fitch at 4%) due to the need to hire new staff to take care of Covid-19 patients, the special Covid-19 bonus paid to the nursing staff (EUR1,500 for each employee) and national measures to increase wages (November 2019 support plan for hospitals, and measures named “Segur de la sante”).
Expenses linked to laboratory testing and sanitary products are also driven up by the crisis.
The French state has committed to cover all the extra staff costs due to the pandemic and national measures. Fitch expects expenditure growth to go back to a more normal level in 2021-2022. Although general salary increases will inflate operating expenses, Fitch expects the historical trend towards ambulatory treatments to mitigate this increase.
Below-Average Expenses
AP-HM’s operating expenses reached EUR1,259 million in 2019 and are mostly made up of staff costs (65%, in line with the national average), pharmaceutical products purchases (27%) and other miscellaneous expenses (8%). They increased by 1.2% a year on average in 2015- 2019, slower than operating revenue, driven mostly by staff costs. In 2019 AP-HM spent about EUR4,000 per stay, 11% less than other French hospitals rated by Fitch.
Staff costs are a rigid expenditure item, which is hard to reduce when revenue declines. Staff is mostly made up of civil servants, whose salaries are determined by a national framework and follow an index set at the national level. AP-HM’s staff-stays ratio is 30% above the median, with about 23 stays per employee compared with 18 for Fitch-rated French hospitals.
However, absences are well below the national average, with a direct impact on expenses.
The purchase of pharmaceutical products is a rigid expenditure item for hospitals. However, it is directly linked to activity, so it may be reduced when activity declines.
AP-HM’s weak liquidity means it is used to paying its providers late, which can result in them increasing their tariffs or endangering AP-HM’s supply chain. At end-2019, 48% of AP-HM’s unpaid bills were over the 50-day regulatory delay for hospitals.
Fitch considers that AP-HM has little flexibility on its operating expenditures, with the various operating expenditure ratios already below the sector’s medians. Due to AP-HM’s worsened financial situation, Fitch considers that strict control of its spending is essential for the hospital’s credit quality.
Large Capex Needs
As for other French hospitals, Fitch assesses AP-HM’s ‘Resource Management Risks’ as
‘Moderate’, whereas ‘Capital Planning and Management’ is ‘Neutral’. The risk of supply constraints is very low for them, but they face some labour constraints for medical and paramedical professions due to the competition with the private sector.
AP-HM’s capex is quite limited, representing only 3% of its operating expenses compared with 5% for the median of hospitals rated by Fitch. The Regional Court of Accounts noted in its 2018 report that a lot of investments were required, notably for the maternity wards and safety updates at the sites of Timone and Nord.
In 2018 AP-HM presented its modernisation plan to the COPERMO, which declared it eligible for public co-funding and approved it on 29 January 2020. This project has two parts:
• A plan to reorganise the hospital, called “Avenir AP-HM”, steered by a Transformation Directorate and aiming at optimising revenue and reducing costs. The plan includes the reorganisation of technical platforms and hospitalisation units, and the optimisation of the patients’ path.
• A restructuring of existing buildings with the construction of a new building at Timone to bring together the maternity and paediatric services, and the disposal of several buildings and land. AP-HM’s capacity in terms of beds should slightly decline, in line with the shift towards outpatient care taken by French hospitals.
Expenses Breakdown (Excl.
Non-Cash Items), 2019
(EURm) (%)
Staff costs 817 65
Goods and services 429 34
Other 12 1
Operating expenses 1,259 100
Memo
Financial expenses 38 -
Capital expenses 45 -
Source: Fitch Ratings, AP-HM
In its financial forecasts, AP-HM plans a significant increase in capex, which should reach EUR80 million a year on average in 2020-2024 (6% of operating expenses) against less than EUR50 million a year until 2019. Total capex includes projects approved and 50% co-financed by COPERMO (EUR343 million in 2019-2029), and recurring and other investments (EUR159 million in 2019-2029).
Capex includes the renovation of hospitalisation units, the creation of ambulatory surgery units, the construction of a new maternity ward, safety work on several buildings, and the creation of a “genopole” (merger of 18 existing laboratories with economies of scale expected).
Total capex should be 30% funded by subsidies and 15% by income from asset disposal (about EUR60 million of asset disposals estimated over 2020-2029).
Financial Profile: Weaker
Improving Debt RatiosOur rating case scenario includes a slowdown in the improvement of EBITDA over the next few years, due to inflationary pressure on operating expenses. Fitch’s capex assumptions are in line with the hospital’s. Fitch expects AP-HM’s net debt-to-EBITDA ratio to improve to below 10 years by 2024.
Our rating case scenario is based on the following assumptions and incorporates AP-HM’s large capex programme. We also assumed that AP-HM will receive extra EUR34 million a year from the state as of 2021 through subsidies (not included in our EBITDA calculation) as part of the French state plan to cover a third of the sector’s debt service. This assumption will be subject to changes when the details of the support plan are outlined.
Fitch’s Base and Rating Cases Main Assumptions
2015-2019 CAGR
2020-2024 Base Rating
National nominal GDP growth (Fitch’s assumptions)a 2.6 1.1 -
Operating revenue growth (%) 2.3 1.5 1.4
GPD deflator Francea 1.0 0.8 -
Operating expenditure growth (%) 1.2 1.5 1.6
Net capital expenditure (average per year; EURm) -26 -21 -21
French government, OAT 10 years (November 2020)a -0.24 - -
Apparent cost of debt (%), 2019 3.7 3.3 3.3
a Sovereign assumptions are based on the Global Economic Outlook published by Fitch on 7 September 2020 for 2020–
2022. For 2023–2024, we have assumed a return to the 2015-2019 average for GDP growth and the GDP deflator Source: Fitch Ratings
AP-HM’s debt ratios are historically high, but improved in recent years. Net debt represented 10x EBITDA in 2019, compared to 29x in 2016 thanks to public subsidies received, improved billing processes and tight control over operating spending. The coverage ratio is moderate, EBITDA being just sufficient to cover the debt service.
2015 2016 2017 2018 2019 2020 2021 2022 2023
0 5 10 15 20 25 30
Hist orical Base case Rat ing case
Net Adjusted Debt/ EBITDA - Fitch's Base and Rating Case Scenarios
(x)
Source: Fit ch Rat ings, AP-HM
Financial Profile Ratios
• Leverage: net adjusted debt / EBITDA (x)
• Gross Interest Coverage: EBITDA / Gross Interest (x)
• + liquidity cushion definition
Fitch’s Rating-Case Scenario The rating case is a through-the-cycle scenario that incorporates a combination of revenue, cost or financial risk stresses.
Fitch’s calculated EBITDA reached EUR102 million in 2019, a sharp improvement compared with 2018 (EUR83 million) and 2017 (EUR72 million), thanks to public subsidies and the strict management of operating expenses. We expect EBITDA to deteriorate to EUR65 million in 2020 before gradually recovering towards EUR100 million in our rating case scenario.
Net debt decreased slightly from EUR1,079 million in 2015 to EUR1,014 million in 2019. We expect it to be around EUR700 million by 2024 in our rating case scenario. AP-HM aims at improving its financial profile in the coming years, as prescribed by its recovery plan with the ARS.
In 2020, the coronavirus pandemic will lead to a sharp decline in the number of surgeries, and a sharp increase in operating spending, including both staff costs (see above) and extra costs linked to new hygiene requirements. However, most of the negative effects will be compensated by the support measures in place by the French state, especially the guarantee to receive the same level of revenue as that of 2019 for most medical activities and the commitment to cover all extra costs triggered by the pandemic.
Liquidity Profile – ‘Weaker’: Structural Feature of the Sector
French public hospitals’ liquidity is generally tight, which is a structural feature of the sector.
Cash must be deposited with the central treasury and cannot earn interest, so there is no incentive to accumulate large amounts of liquidity. The low level of available cash is offset by the predictability of hospitals’ main cash flows and French hospitals’ access to liquidity support from the French state through ARS. Fitch therefore applies a low weight to French public hospitals’ liquidity profile in the final SCP assessment. At end-2019 AP-HM’s liquidity cushion was very weak at 0.0%, a characteristic of the sector.
This weak liquidity is also constrained by the hospital’s negative working capital estimated at EUR50 million at end-2019, leading the hospital to use credit facilities with commercial banks that it has to pay for.
At end-2019, AP-HM had a EUR50 million credit facility available with the Caisse d’Epargne CEPAC (A+/Negative), of which EUR25 million was undrawn in November 2020, covering 15 days of operating expenses. The credit facility is available until November 2021. AP-HM has also concluded a second EUR20 million committed credit line with Credit Agricole (A+/Negative), available until December 2021.
AP-HM entered into a factoring contract with La Banque Postale (A-/Stable) in May 2018 to bridge the gap between when the medical procedures are carried out and when the hospitals get paid by the social security. This acts as a cash advance with an annual amount limited to EUR690.5 million. It enables the hospital to smooth its liquidity needs over the year.
AP-HM’s liquidity is also supported by the diversity of its funding sources, which include commercial banks (its main lender, SFIL CAFFIL, only represents 20% of its outstanding debt) and bonds.
-100 -50 0 50 100
2014 2015 2016 2017 2018 2019
T2A Other public transfers Other revenue St aff cost s
M edical product s Other opex EBITDA
Source: Fit ch Rat ings, AP-HM
Annual Changes in EBITDA and Components (EURm)
Liquidity Cushion Calculation
(EURm) 2020rc
Available cash, 2019rc 0
Unrestricted cash, 2019rc 0
Liquid Investments, 2019rc 0 Undrawn committed credit lines 25
EBITDA, 2020rc 65
Debt service, 2020rc -112
Cash operating expenditure,
2020rc -1,312
Liquidity cushion (x) 0.0 rc: Rating-case scenario
Source: Fitch Ratings, AP-HM
Asymmetric Risks: Neutral
AP-HM’s debt structure is sound. At end-2019, 70% of the debt was fixed rate and 93% was considered risk free by national regulations (plain vanilla). About 4% of the debt (EUR40 million) is considered risky, but EUR11 million is covered by a swap contract, reducing the risky part to EUR29 million. Fitch considers the risk to be manageable for the hospital.
The debt includes a public-private partnership signed in 2010 for a logistics platform, with EUR69 million remaining to be paid at end-2019.
The risk of weak governance and management remains limited due to the tight monitoring by the ARS. The ARS may even place a public hospital under provisional administration in case of financial difficulties.
Asymmetric Risks Assessment
Debt structure and contingent liabilities
Management and governance
Legal and regulatory
Information quality
Country ceiling and legal regime
Neutral Neutral Neutral Neutral Neutral
Source: Fitch Ratings
Peer Analysis
AP-HM’s ‘bb’ SCP is the same as Assistance Publique-Hopitaux de Paris, whose debt ratios are slightly above AP-HM’s in Fitch’s rating case scenario. AP-HM’s SCP is above that of Nancy hospital, whose debt ratios are higher than AP-HM’s.
Peers
French hospitals Sponsor
GRE Score
Leverage,
2024rc SCP IDR Rating approach
AP-HM French state 35 7.3 bb AA- Top-down, -1
Assistance Publique-
Hopitaux de Paris French state 50 9.7 bb AA Ratings equalisation
Nancy, CHU French state 35 12.9 bb- AA- Top-down, -1
Rennes, CHU French state 35 5.8 bbb AA- Top-down, -1
Roubaix, CH French state 30 3.9 bbb+ A+ Top-down, -2
Strasbourg, CHU French state 35 9.1 bb AA- Top-down, -1
International peers
Erasmus MC Netherlands 35 6.4 aa cat AAA Ratings equalisation Elizabeth-
TweeSteden Ziekenhuis
Netherlands 12.5 3.4 a- A Bottom-up, +1
Stichting Noordwest Ziekenhuisgroep
Netherlands 17.5 3.6 a- A+ Bottom-up, +2
Source: Fitch Ratings
ESG Considerations
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of ‘3’ – ESG issues are credit neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on our ESG Relevance Scores, visit: https://www.fitchratings.com/site/esg.
Debt Analysis
End-2019 Fixed rate (% of adjusted debt) 70 Short-term debt (% of adjusted
debt)
3
Average cost (%) 3.00
Average maturity (years) 8.5 Source: Fitch Ratings, AP-HM
0 10 20 30 40 50 60 70 80 90 100
2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031
Source: Fit ch Rat ings, AP-HM
Debt Amortisation (EURm)
Appendix A
(EURm) 2015 2016 2017 2018 2019
Income statement
Operating revenue 1,259 1,324 1,312 1,347 1,383
Operating expenditure -1,280 -1,316 -1,302 -1,309 -1,344
Interest revenue 5 0 0 11 10
Interest expenditure -36 -34 -32 -41 -38
Other non-operating items -9 -16 10 3 34
Taxation 0 0 0 0 0
Profit (loss) after tax -61 -41 -11 11 45
Memo: Transfers and grants from public sector 57 73 60 68 64
Balance sheet summary
Long-term assets 1,006 946 920 893 876
Stock 13 17 17 17 19
Trade debtors 240 168 165 170 198
Other current assets 28 38 31 56 57
Total cash, liquid investments, sinking funds 1 1 6 0 4
Total assets 1,288 1,171 1,138 1,135 1,153
Long-term liabilities 1,120 1,137 1,107 1,099 1,084
Short-term debt 79 69 74 33 55
Trade creditors 162 196 186 216 183
Other short-term liabilities 35 43 46 54 61
Charter capital 200 200 203 205 205
Reserves and retained earnings -307 -474 -479 -471 -436
Minority interests 0 0 0 0 0
Liabilities and equity 1,288 1,171 1,138 1,135 1,153
Debt statement
Short-term debt 79 69 74 33 55
Long-term debt 916 914 912 914 890
Finance leases 85 81 77 73 69
Subordinated debt 0 0 0 0 0
Total debt 1,079 1,063 1,063 1,020 1,014
Unfunded pension liabilities 0 0 0 0 0
Other Fitch-classified debt 0 0 0 0 0
Adjusted debt 1,079 1,063 1,063 1,020 1,014
Unrestricted cash, liquid investments, sinking funds
0 0 0 0 4
Net adjusted debt 1,079 1,063 1,063 1,020 1,010
EBITDA reconciliation
Operating balance -21 8 11 38 39
+ Depreciation 69 69 73 68 70
+ Provision and impairments 12 8 14 9 15
+/- Other non-cash operating expenditures/revenues
-17 -48 -26 -32 -22
= EBITDA 44 37 72 83 102
Source: Fitch Ratings, Fitch Solutions, Assistance Publique Hopitaux de Marseille
Appendix B
2015 2016 2017 2018 2019 Income statement ratios
Operating revenue growth (annual % change) 0.6 5.2 -0.9 2.7 2.7 Operating expenditure growth (annual % change) 1.0 2.8 -1.1 0.6 2.7
EBITDA/operating revenue (%) 3.5 2.9 5.6 6.3 7.5
CFADS/revenue available for debt service (%) 3.5 2.9 5.6 6.3 7.5 Personnel costs/operating expenditure (%) 65.2 64.3 66.0 65.6 64.9 Total transfers from public sector/operating revenue
and ad-hoc transfers (%) 4.6 5.7 4.7 5.2 4.7
Balance sheet ratios
Current assets/adjusted debt (%) 26.2 21.1 20.5 23.8 27.4
Current assets/total assets (%) 21.9 19.1 19.2 21.4 24.1
Total assets/adjusted debt (%) 119.4 110.1 107.1 111.3 113.8
Return on equity (%) 56.8 15.0 4.1 -4.1 -19.5
Return on assets (%) -4.7 -3.5 -1.0 1.0 3.9
Debt ratios
Net adjusted debt/EBITDA (x) 24.8 28.9 14.8 12.3 9.9
Net adjusted debt/CFADS (x) 24.8 28.9 14.8 12.3 9.9
EBITDA/gross interest coverage (x) 1.2 1.1 2.2 2.0 2.7
CFADS/gross interest coverage (x) 1.2 1.1 2.2 2.0 2.7
Net adjusted debt/operating revenue (%) 85.7 80.3 81.0 75.7 73.0 Net adjusted debt/equity (%) -1,003.9 -387.0 -385.4 -382.9 -438.5
Debt in foreign currency/total debt (%) 0.0 0.0 0.0 0.0 0.0
Debt at floating interest rates/total debt (%) 0.0 0.0 0.0 0.0 0.0
Issued debt/total debt (%) 7.9 11.6 14.2 16.4 16.1
Liquidity ratios
Liquidity cushion (x) 0.0 0.0 0.0 0.0 0.1
Coverage ratio (x) 1.4 1.8 2.0 1.8 2.9
Source: Fitch Ratings, Fitch Solutions, Assistance Publique Hopitaux de Marseille
Appendix C
(EURm) 2020rc 2021rc 2022rc 2023rc 2024rc
Cash-adjusted income statement
Operating revenue 1,377 1,390 1,411 1,433 1,457
Operating revenue growth (annual % change)
1.2 0.9 1.5 1.6 1.6
Operating expenditure -1,312 -1,312 -1,327 -1,342 -1,357
Operating expenditure growth (annual % change)
4.2 0.0 1.1 1.1 1.1
EBITDA 65 77 83 90 97
Interest revenue 0 0 0 0 0
Interest expenditure -30 -30 -29 -28 -28
Financial balance -30 -30 -29 -28 -28
Net capital expenditure -27 -4 -35 -23 -18
Capital injection and other cash-items 0 0 0 0 0
Dividend paid 0 0 0 0 0
Other cash-items (net) 0 34 34 34 34
Net debt movement -7 -77 -54 -73 -84
Change in cash 0 0 0 0 0
Debt and liquidity
Adjusted debt 1,003 922 865 789 706
Memo: Non-cash movement in
adjusted debt -3 -3 -4 -3 1
Unrestricted cash 0 0 0 0 0
Net adjusted debt 1,003 922 865 789 706
Financial and liquidity ratios
Net adjusted debt/EBITDA (x) 15.5 11.9 10.4 8.8 7.3
EBITDA/gross interest coverage (x) 2.2 2.6 2.9 3.2 3.400
Liquidity cushion (x) 0.0 0.0 - - -
Liquidity coverage ratio (x) 1.2 1.2 - - -
rc - Fitch's rating-case scenario
Source: Fitch Ratings, Fitch Solutions, Assistance Publique Hopitaux de Marseille
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