Grifols Gets Downgraded: Fitch, S&P Flag Cash Flow Concerns At Pharma Company

Grifols SA GRFS shares were down more than 9.1% on Thursday after credit rating agencies Fitch and S&P slashed their ratings for the troubled pharmaceutical company. 

What Happened: Grifols shares are among the worst performers in Spain’s blue-chip index. 

Fitch cited “slower-than-expected deleveraging” as the reason for the downgrade, emphasizing the significant shortfall in free cash flow generation for 2023 and 2024, Reuters noted. 

However, there’s a glimmer of hope as the pending sale of Grifols’ 20% stake in Shanghai RAAS, slated to close in the first half of 2024 pending regulatory approval, could ease the refinancing pressure, according to Fitch. 

Meanwhile, S&P echoed similar concerns about Grifols’ cash flow and refinancing risks, leading to its downgrade.

In response to the rating actions, citing Grifols, Reuters highlighted that the company acknowledged the challenges posed by upcoming maturities in 2025 but reassured stakeholders of its commitment to address them promptly. 

The Barcelona, Spain-based company emphasized ongoing efforts to enhance leverage levels while maintaining business continuity.

Grifols recently announced an ambitious operating cash flow generation target for 2024, aiming to surpass €900 million before one-off items. 

The company has set its sights on generating between €2 billion and €2.5 billion in free cash flow before dividends from 2025 to 2027, seeking to reverse the negative trend observed in 2023.

Last week, Gotham City Research issued a new publication about Grifols, questioning the company’s “transparency, integrity and ethical conduct.”

Gotham said Grifols’ representation of the lending activity was “neither detailed nor correctly identifies the nature of the transactions.”

As per the initial Gotham report released in January, ‘Grifols’ actual debt could be closer to €8.9 billion, significantly higher than the reported €8 billion. They estimate that the company’s leverage is not the reported 6x but could be alarmingly between 10x-13x.

Grifols could face drastically higher financing costs if these claims are substantiated, potentially pushing the company into an unsustainable financial position.

Price Action: GRFS shares are down 9.70% at $5.73 on the last check Thursday.

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