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Yestar Healthcare Holdings Company Limited -- Moody's downgrades Yestar's ratings to Caa1; outlook remains negative

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Rating Action: Moody's downgrades Yestar's ratings to Caa1; outlook remains negativeGlobal Credit Research - 14 Apr 2021Hong Kong, April 14, 2021 -- Moody's Investors Service has downgraded the corporate family rating (CFR) and senior unsecured rating of Yestar Healthcare Holdings Company Limited to Caa1 from B3.The outlook on the ratings remains negative.In its 2020 results announcement dated 7 April, Yestar indicated that there are significant uncertainties as to whether the company can continue as a going concern. The company's ability to continue as a going concern will depend on successful negotiation with lenders and bond holders on the due dates of maturing debts and with non-controlling shareholders on the due dates of its payables, as well as obtaining additional financing facilities within the next 12 months.In addition, the company has appointed a financial advisor regarding the upcoming maturity of its USD200 million senior notes due on 15 September 2021."The downgrade to Caa1 and negative outlook reflect Yestar's higher probability of default given its increased liquidity risk, with a USD200 million bond due in September 2021," says Gerwin Ho, a Moody's Vice President and Senior Credit Officer.RATINGS RATIONALEYestar's Caa1 corporate family rating is constrained by its modest size, high supplier concentration, large repayment and working capital needs over the next 12 months and weak financial management. These credit challenges offset its solid position in the distribution of medical consumable products in China and strong and sustained partnership with leading global companies, including Roche Holding AG (Aa3 positive) and FUJIFILM Holdings Corporation (A2 stable); the latter held a 9.8% stake in Yestar as of 30 June 2020.Yestar's liquidity is weak. As of 31 December 2020, the company's cash reserves -- including restricted cash -- of RMB587 million were insufficient to cover its short-term debt, which includes a USD200 million bond due in September 2021.Moody's expects Yestar's working capital needs to rise with the growth of its IVD distribution and service provision business, given the longer payment terms associated with this business. The company's medical business, which includes the higher margin IVD business, accounted for 92% of total revenue in 2020.At the same time, Moody's expects Yestar's short-term debt to increase to fund its higher working capital needs and payments associated with previous acquisitions.Moody's forecasts Yestar's revenue will grow about 9% over the next 12-18 months from the level in 2020. The rise reflects the continued growth in demand for medical consumable products in China supported by the company's increased market share and growing geographical coverage, and partially offsetting weakening demand in its non-medical businesses.Moody's expects Yestar's leverage, as measured by adjusted debt/EBITDA, will stay at about 3.7x over the next 12-18 months from about 4.0x in 2020 as the increase in EBITDA resulting from a revenue recovery outpaces the rise in debt to fund its business growth and acquisition-related payments.From a governance perspective, management had also adopted an acquisitive growth strategy and exhibited weak financial management in terms of addressing its near-term maturities.Yestar's senior unsecured bond rating is not affected by subordination to claims at the operating company level. This is because creditors at the holding company benefit from cash flow generation across a number of operating subsidiaries, mitigating structural subordination risk.FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGSThe negative outlook reflects the high uncertainty over Yestar's ability to arrange funding on a timely basis to meet its near-term refinancing needs.The outlook on Yestar's ratings could return to stable if the company executes its refinancing plan and improves its liquidity position and capital structure.Yestar's ratings could be further downgraded if it fails to meet its payment obligations.The principal methodology used in these ratings was Distribution & Supply Chain Services Industry published in June 2018 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1121974. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.Headquartered in Shanghai and listed on the Hong Kong Stock Exchange since October 2013, Yestar Healthcare Holdings Company Limited is a distributor of Roche Holding AG's (Aa3 positive) diagnostics products in China and is also a distributor of FUJIFILM Holdings Corporation's (A2 stable) film products in the country.REGULATORY DISCLOSURESFor further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.These ratings are unsolicited.a.With Rated Entity or Related Third Party Participation: NOb.With Access to Internal Documents: NOc.With Access to Management: NOFor additional information, please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.Moody's considers a rated entity or its agent(s) to be participating when it maintains an overall relationship with Moody's. Unless noted in the Regulatory Disclosures as a Non-Participating Entity, the rated entity is participating and the rated entity or its agent(s) generally provides Moody's with information for the purposes of its ratings process. Please refer to www.moodys.com for the Regulatory Disclosures for each credit rating action under the ratings tab on the issuer/entity page and for details of Moody's Policy for Designating Non-Participating Rated Entities.Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1243406.At least one ESG consideration was material to the credit rating action(s) announced and described above.The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.The first name below is the lead rating analyst for this Credit Rating and the last name below is the person primarily responsible for approving this Credit Rating. 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