Description

Description

Korian’s 2.25% Euro senior unsecured bonds, maturing in October 2028, are trading around 69%, with a yield-to-maturity of 10% and a cash-on-cash yield of 3.3%.  I think they are a BUY. The implied credit spread is gargantuan when compared to the French OAT 6 year benchmark yield around 2.3%. Those are distressed levels, but my differentiating view is that those bonds should prove money good as the current tempest surrounding the retirement homes business and the demise of its main competitor Orpea subsides, access to ESG financial markets improve thanks to Korian’s CEO initiative,  and punitive spreads tighten.

Year-to-Date performance

Basic facts about Korian

For those who aren’t familiar with the name, some basic facts.

Korian is the European leader in private retirement homes, what they label Long Term elderly care, with a  #1 position in France, Germany, Belgium and Italy,  714 facilities and 65k beds in prime locations, including major urban areas (Paris, Lyon, Toulouse, Marseille, Bordeaux,Düsseldorf, Bremen, Roma, Firenze).

Korian also boasts two other business divisions: Healthcare- with 167 facilities and 10k beds, which is basically clinics for outpatients visits. And a growing Community care division, which provides services at home or in care communities outside their own network- representing about 16k beds.

Competition is Orpea- which is of similar size, approaching 100k beds, with Domus Group a distant third (about 50k beds).

Thanks to a healthy free cash flow generation and accretive M&A, past growth has been quite resilient and self-financed. Turnover for 2022 should reach EUR 4.5bln,  up from EUR 3 bln in 2016, for a 6 year CAGR of +7.1%.  

Until 2020, Ebitda margin was above 15% and levered Free Cash Flow margin was hovering around 6% of revenues.

Needless to say Covid and the subsequent scandal engulfing the sector have thrown the trajectory quite a bit off rail. Korian has to face growing staff costs, rising inflation across goods and services purchased, a lower occupancy rate post-Covid that needs normalising, a very high and almost structural level of absenteeism, and following the scandal (more on this later), a much increased level of scrutiny on its affairs which should have a long term negative impact on its compliance costs, on its public subsidies, maybe on the maintenance capex of its facilities….

In spite of those numerous challenges Korian is still targeting a 13.9% ebitda margin for 2022 and circa EUR 300m Free Cash Flow for 2022/2023 with a 6% organic growth.

See below from their last Capital Market Day for past cash flow generation and cash conversion.

Capital Structure-some key elements at H2 2022.

Real Estate Gross Value is EUR 3.3bln, supporting a Real Estate Debt of EUR 1.8 bln for a LTV of 55% and a Net Equity Value to Korian of about EUR 1 billion.

This more or less equates to the Fully Diluted Market Cap today, around EUR 900 million.

Net financial debt at the Opco level, i.e. excluding Real Estate debt, was EUR 1.778m, translating into a leverage of X3.6- which gives them a decent cushion from the x4.5 covenants.

Liquidity comprises cash of 884m and a Revolving Credit facility maturing in 2025 of 500m, for a total of EUR 1.4 bln  that covers future debt maturities as follows:

This is how I reconcile the debt structure:

There is no sugar-coating it: Korian is cash generative, no doubt, but relies on good access to financial markets and the confidence of a diversified set of investors in order to roll its debt. Past Schulschein issuance, for instance, such as in October 2021, were largely oversubscribed; but the current mood and appetite and ESG hurdles greatly differ.

Its competitor Orpea, which was way more leveraged and with doubtful marks on their self-owned Real Estate portfolios, had to bite the bullet, could not divest quick enough at decent prices, went through some massive asset impairment  and face with a vicious liquidity crunch, is currently trying to restructure through a debt to equity recap (this is fought by some activists). 

The scandal - "Les Fossoyeurs"- a book published in January 2022

The retirement house business, or “EPHAD” private sector has been under a deluge of fire following the publication of a book called ``Les Fossoyeurs" ("The Gravediggers") in January 2022. This sparked a nationwide debate on nursing conditions for the elderly. A French government administrative investigation was then made public by the French Parliament in April 2022 with a  Social Affairs Committee report as well as findings from the Inspection générale des affaires sociales, or IGAS, and the l’Inspection générale des finances, or IGF.

It was not Korian but Orpea which had been investigated by the journalist; his findings, further confirmed since then by various private and public audits and inquiries, were damning: a systemic optimization of public subsidies, of rebates on procurement, of drastic cost cutting. Sparking outrage, in  particular, were revelations that Orpea’s maximum budget per meal was set at EUR 1 per patient for all food and beverage, the same patients that were paying on average 2,700 euros per month for this supposedly top notch retirement home service; and that cooks frequently resorted to adding protein powder to enhance calories level on the cheap; and that diapers were rationed to less than 2 per day per patient.

Faced with a barrage of criticism in the wake of the Orpea’s scandal, Korian’s CEO, Sophie Boissard, was also deposed by the French Parliament. It is widely recognized that she put up a much more convincing defence than her competitor.

I find it particularly smart that she is seeking to transform Korian (subject to a 2023 AGM vote) into a newly minted French legal corporate scheme called Societe a Mission. This should go a long way to soothe some worries, because it would force Korian to stick to some externally-audited key  ESG standards.

I would also think the presence of Credit Agricole Assurances, of Humanis Malakoff and Sycomore on the shareholder register could form a reassuring core basis of credibility vis a vis its ethical behaviour.

Catalyst

Corporate legal structure to become a "societe a mission" in 2023, providing key ESG appetite.