Fortrea Holdings downgraded to 'B-' by S&P Global Ratings due to weak credit metrics

S&P Global Ratings downgraded Fortrea Holdings Inc. to 'B-' from 'B+' due to persistently high leverage and negative cash flow, with a stable outlook reflecting expectations of gradual improvements in EBITDA margins and leverage. The downgrade follows challenges Fortrea faced becoming a standalone entity post-spin-off from Labcorp, resulting in lower-than-expected EBITDA margins (less than 6% projected for fiscal 2025) and cash flow. While Fortrea targets $150 million in annual gross cost reductions and expects low- to mid-single-digit percent revenue growth in 2026, profitability is expected to lag peers for several years.

Analysis

S&P Global Ratings has downgraded Fortrea Holdings Inc. to 'B-' from 'B+', primarily due to persistently high leverage and negative cash flow, signaling significant ongoing financial stress following its spin-off from Labcorp. The rating agency anticipates Fortrea's credit metrics will remain weak for several years, with projected S&P Global Ratings-adjusted EBITDA margins for fiscal 2025 now below 6%, a stark contrast to the initially expected 12%-13%, though a slight improvement to around 8% is forecast for 2026. This underperformance, coupled with cash flow shortfalls not meeting previous expectations, has led to a re-evaluation of Fortrea's business risk from 'fair' to 'weak' and a shift to using gross debt in S&P's adjusted debt measure. Despite these challenges, Fortrea is implementing business optimization efforts, targeting $150 million in annual gross cost reductions and has nearly completed exiting transition support agreements, which are expected to alleviate some cost pressures, although restructuring costs have negatively impacted cash flow. While profitability is projected to lag peers for a few more years as older, less profitable contracts phase out, the company has maintained bookings comparable or favorable to larger public peers over the last three quarters and anticipates low- to mid-single-digit revenue growth in 2026, driven by newer, more profitable post-spin projects. The 'stable' outlook reflects expectations of positive free cash flow generation for the remainder of 2025 and subsequent years, gradual margin improvement, and deleveraging, though further downgrades are possible if cash flow deficits persist or liquidity becomes strained.

Key Decisions for Investors

• Investors should exercise caution given Fortrea's 'B-' credit rating, persistently high leverage, and the weak near-term profitability outlook, closely monitoring its ability to generate positive free cash flow and achieve guided EBITDA margin improvements in late 2025 and 2026.
• The success of the $150 million annual gross cost reduction plan and the effective transition to more profitable post-spin contracts are critical inflection points; realization of these targets could signal a financial turnaround, whereas failure poses substantial downside risk to the current weakened credit profile.
• While sustained strong bookings and projected low- to mid-single-digit revenue growth in 2026 offer a potential path to recovery, these must be carefully weighed against immediate credit concerns, the extended timeline for profitability to align with peers, and the risk of further rating downgrades if financial improvements do not materialize as anticipated.