Auxilium Pharma (AUXL) CCR Raised to 'CCC+'' by S&P

Standard & Poor's Ratings Services raised its corporate credit rating on Auxilium Pharmaceuticals Inc. (Nasdaq: AUXL) to 'CCC+' following the announced restructuring program and a $50 million add-on to its existing first-lien term loan.

At the same time, we raised our senior secured rating to 'B-' from 'CCC+'. The '2'recovery rating is unchanged and reflects our expectation for substantial (70%-90%) recovery in the event of payment default.

"The upgrade reflects our view that the near-term risk of a covenant breach has abated. Auxilium's credit agreement allows the company to add expected restructuring cost savings to EBITDA, enabling covenant compliance," said credit analyst Maryna Kandrukhin. "Still, the 'CCC+' rating on Auxilium primarily reflects our view that the company's capital structure is unsustainable. We believe continued free cash outflow, resulting from high contingent consideration payments, will constrain the company's ability to refinance its debt in 2017 to 2018."

Our stable outlook on Auxilium reflects our expectation that revenue will grow 15% in 2015 and that the company's cash balance, improved by the expected QLT merger and the $50 million add-on loan, will provide an ample liquidity cushion over the next year. This is despite our expectation of near-term cash flow deficits, mainly resulting from high contingent consideration payments.

Downside scenario

We could lower the rating if the company depletes cash faster than we currently estimate, or if the realized cost savings are significantly weaker than we project, increasing the likelihood of a covenant breach over the next 12 months.

Upside scenario

We could raise our rating if we become convinced that Auxilium can refinance its financial obligations in 2017 to 2018. In our view, stronger EBITDA margins, improved by restructuring efforts and stable revenue growth, would likely result in minimal/zero cash flow deficits, possibly signaling a sustainable capital structure.

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