Moody's Rates Concordia's (CXRX) Latest Notes Offering at 'B1'; Outlook Lowered to Negative
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Moody's Investors Service, ("Moody's") assigned a B1 rating to Concordia International Corp.'s (Nasdaq: CXRX) new senior secured notes. Moody's also affirmed the existing ratings of Concordia, including the B3 Corporate Family Rating and B3-PD Probability of Default Rating, the B1 on existing senior secured debt and the Caa2 on the senior unsecured notes. Moody's also affirmed the Speculative Grade Liquidity rating of SGL-2, signifying good liquidity. Moody's also changed the rating outlook to negative from stable.
Proceeds of the new senior secured notes will be used for general corporate purposes, including funding of pipeline products, small regional product acquisitions and upcoming contingent payments.
"While the notes offering improves liquidity over the next 12 months, it further increases Concordia's leverage at a time when the company is facing a number of business challenges" said Jessica Gladstone, Senior Vice President with Moody's. The change in outlook to negative reflects the risk that the company is not able to sustainably grow earnings given capital constraints and scrutiny on rising drug prices. The inability to grow earnings over the longer-term could lead to an unsustainable capital structure and challenges in refinancing. That said, liquidity remains good and the company has several years until it needs to address refinancing its debt.
The SGL-2 signifies our expectation for good liquidity over the next 12-18 months. The proceeds of the offering, together with operating cash flow, will provide sufficient liquidity to pay all acquisition related contingent payments and debt maturities over the next 12-18 months. Moody's anticipates there will also be sufficient liquidity to pursue modest size acquisitions that could be accretive to EBITDA. That said, the addition of a significant amount of secured debt to the capital structure substantially limits the company's use of the revolver because of the minimal cushion under the covenant, should it be tested. The covenant on the revolver is only tested if more than 30% is drawn.
Corporate Family Rating, B3
Probability of Default Rating, B3-PD
Senior Secured Rating, B1 (LGD2)
Senior Unsecured Rating, Caa2 (LGD5)
Speculative Grade Liquidity Rating, SGL-2
$350 senior secured notes due 2022, B1 (LGD2)
Outlook to negative from stable.
The B3 Corporate Family Rating of Concordia reflects its very high financial leverage. Moody's estimates adjusted debt-to-EBITDA (following the contemplated notes offering) of nearly 8.0 times for the year ending December 31, 2016. The rating also reflects Moody's view that Concordia will be challenged to sustainably grow its revenue and earnings organically as many of its North America legacy products will decline. The company will either need to invest substantially to fill an internal R&D pipeline or will need to make acquisitions in order to sustain longer-term growth.
The rating is supported by the company's high profit margins, low cash taxes and low capital expenditures which will result in high conversion of revenue into free cash flow. The B3 is also supported by the company's good product and geographic diversity, as well as the expectation of good liquidity.
The ratings could be downgraded if Moody's expects leverage to increase from current levels or if liquidity weakens. Operating set-backs related to key products or material pricing pressure from regulatory changes or general drug pricing scrutiny that results in likely declines in earnings could lead to a downgrade.
The ratings could be upgraded if Concordia can demonstrate sustained organic revenue growth and stable cash generation. The ratings could be upgraded if Moody's expects debt to EBITDA to be sustained below 6.0x.
The principal methodology used in these ratings was Global Pharmaceutical Industry published in December 2012. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.
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