Endo's (ENDP) Ratings Cut to 'B1' by Moody's; Outlook is Negative

Moody's Investors Service downgraded the ratings of Endo Luxembourg Finance I Company S.à.r.l., Endo Finance Co. and Endo Finance LLC, all subsidiaries of Endo International plc ("Endo")(Nasdaq: ENDP). Moody's downgraded the Corporate Family Rating and Probability of Default Rating to B1 and B1-PD from Ba3 and Ba3-PD, respectively. The rating on the senior secured debt was downgraded to Ba2 from Ba1 and the rating on the senior unsecured debt was downgraded to B3 from B1. Moody's also affirmed the SGL-2 Speculative Grade Liquidity Rating. The rating outlook is negative.

The downgrade of the Corporate Family Rating incorporates a number of negative developments over the last several months including generic competition on Voltaren Gel and a significant increase in vaginal mesh litigation accruals. More recently, competition and pricing pressure has intensified in Endo's generic business, particularly within legacy Qualitest opioid products. These developments have culminated in Endo significantly reducing its expectations for revenue, earnings and cash flow in 2016. With earnings growth constrained by multiple headwinds, and free cash flow constrained by litigation payments, debt/EBITDA will likely be sustained around 5.0x with limited ability for Endo to deleverage meaningfully over the next 12-18 months.

The negative outlook reflects uncertainty around when Endo will be able to return to sustained earnings and revenue growth. Further, the negative outlook reflects the risk of further downward revisions to financial expectations given multiple headwinds across Endo's branded and generic businesses.

Ratings downgraded:

Issuer: Endo Luxembourg Finance I Company S.à.r.l.

Probability of Default Rating, to B1-PD from Ba3-PD

Corporate Family Rating, to B1 from Ba3

Senior Secured Bank Credit Facility, to Ba2 (LGD2) from Ba1 (LGD2)

Issuer: Endo Finance Co.

Senior Unsecured, to B3 (LGD 5) from B1 (LGD5)

Issuer: Endo Finance LLC

Senior Unsecured, to B3 (LGD 5) from B1 (LGD5)

Rating Affirmed:

Issuer: Endo Luxembourg Finance I Company S.à.r.l.

Speculative Grade Liquidity Rating at SGL-2

The outlook is negative.

RATINGS RATIONALE

The B1 Corporate Family Rating reflects Endo's strong scale and diversity by product, and its good balance between branded and generic drugs. The ratings are also supported by Endo's stated leverage target of 3.0x-4.0x, and Moody's expectation that the company will generate strong free cash flow beyond 2017, once Endo has gotten past the bulk of its litigation-related payments.

The ratings are constrained by the high financial leverage stemming from the company's aggressive M&A strategy. Endo also faces significant litigation expense over the next several years and there is a risk that legal liabilities (related to mesh as well as anti-trust and other investigations/lawsuits) continue to climb. Additionally, sector-wide headwinds, such as mounting scrutiny on pharmaceutical price increases and declining prescriptions of opioid medications will also constrain Endo's ability to grow.

The SGL-2 rating signifies Moody's expectation of good liquidity supported by adequate internal sources of cash to cover the majority of litigation expense, capital requirements and required debt repayments over the over the next 12-18 months. Liquidity is also supported by a $1 billion revolver, which we expect to remain largely undrawn, and solid forecasted cushion under financial maintenance covenants.

Moody's could downgrade the ratings if the company experiences further operating set-backs or pursues share repurchases or acquisitions in lieu of repaying debt. Specifically, if Endo is expected to sustain debt to EBITDA above 5.0x, Moody's could downgrade the ratings. Any weakening of liquidity or a significant increase in litigation accruals could also lead to a downgrade.

While not expected over the near-term, Moody's could upgrade the ratings if Endo moves past its mesh litigation and repays debt such that debt/EBITDA is sustained around 4.0x. Strong growth of new product launches such that underlying revenue and earnings growth appears sustainable could also support an upgrade.

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