High Yield : Defensive CCC+

For those familiar with the sector we suggest jumping right to the Covid-19 section and the Relative value part. We stress - test ed liquidity profile of Cerba, Synlab and Unilabs under the lockdown . Overall , the result is encouraging – the probability that companies will run out of cash or breach covenants during the health crisis is very low. Also, the pushed back maturity walls and in-house conservative stress tests communicated by the management support our view. As the sector is very strong fundamentally, considered as defensive and partly a beneficiary of the situation thanks to Covid-19 testing, its spreads did not widen as much as the rest of the market. However, we believe that there is still some value left in the Notes mainly on the back of their low credit rating (notes are rated CCC+ on average), which is a limitation for some investors th ese days . Recent performance and market risk metrics of the sector are rather close to that of €BB while the premium is almost twice higher for laboratories. I have never thought I would say that , but this is a defensive CCC+ . Our recommendation is to “ o verweight” the sector. Inside the sector, we prefer Synlab Unsecured 2023 yielding 7.7 % vs. Cerba and Unilabs notes whose yield are about 6.8 %. Approximately 1 00 bp premium for subordinated structure and relatively worse operational performance looks attracti ve as we expect all three companies to navigate well the downturn. Favorable demographics, increasing number of people with chronical diseases, growing public health awareness, and trend on disease prevention rather than treatment have all contributed to sharply increased volumes of tests that laboratories perform. At the same time, the French market has witnessed significant regulation changes aimed to sharply decrease healthcare system deficit . While regulatory pressure across Europe is credit negative, in most cases it is predictable as the authorities constantly communicate on changes . However, some geographies, e.g. Nordics and Spain, have exceptional legal environments where there is a risk of contract renewals. The regulation has significantly changed the landscape of the market . Endless M&A activity of Cerba, Unilabs and Synlab ( supported by PE funds ) has no geographical boundaries. While the Big Three are exploring opportunities outside of Europe: Peru, Middle East and Africa, transaction multiples of disclosed deals in Europe have reached almost 10.0x EBITDA on average vs. 5.5x (pre-synergies) ten years ago . Although extensive M&A is the main concern, r ecent market consolidation across Europe boosted profitability of medical laboratories: realized economies of scale, automation, continuing optimization programs have allowed companies to increase EBITDA margin even under extremely strict regulatory framework.