Moody's Rates Perrigo's (PRGO) $2.3B Notes Offering at 'Baa3'
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Moody's Investors Service assigned Baa3 ratings to Perrigo Company Limited's (NYSE: PRGO) proposed $2.3 billion senior unsecured notes in various maturities. Perrigo plans to partially finance its proposed $8.6 billion acquisition of Elan Corporation, plc (Elan), the refinancing of Perrigo Company's existing debt, and transaction costs with the net proceeds from the notes. Other funding will come from approximately $1 billion of new term loans (unrated), approximately $2.4 billion of cash currently held by Elan and Perrigo Company, and approximately $5.6 billion of new equity. The rating outlook is stable.
Ratings Assigned to Perrigo Company Limited
- Senior Unsecured Regular Bond/Debenture, at Baa3
RATINGS RATIONALE
Perrigo's Baa3 senior unsecured ratings reflect its attractive growth prospects for store brand and generic pharmaceutical products, strong and stable EBITDA margins in the low 20% range, good free cash flow, and commitment to a conservative 2x leverage target (as defined in the company's credit agreement). Moody's projects that the step-up in Tysabri royalties held by Elan, growth in Perrigo's earnings, and debt repayment will reduce debt-to-EBITDA leverage (approximately 3.2x LTM 9/30/13 incorporating Moody's standard adjustments and pro forma for the Elan acquisition) to a mid 2x range by the end of calendar 2014. Perrigo is acquisitive and this creates event risk. Acquisitions can shift the asset risk profile, create integration/execution challenges, and lead to higher debt, but will also continue to increase diversity and build much-needed scale. Perrigo's projected cash flow and 2.0x leverage target create the capacity and willingness to maintain moderate leverage while allowing for continued re-investment in growth initiatives. The rating also reflects the intensely competitive operating environment -- including the presence of larger and better capitalized players, and customer concentration - including the approximate 19% of revenue generated from Wal-Mart - that creates potential pricing pressure. The rating also reflects limited geographic diversity relative to large global peers with roughly 81% of revenue generated in the US.
Perrigo's Baa3 senior unsecured ratings reflect its attractive growth prospects for store brand and generic pharmaceutical products, strong and stable EBITDA margins in the low 20% range, good free cash flow, and commitment to a conservative 2x leverage target (as defined in the company's credit agreement). Moody's projects that the step-up in Tysabri royalties held by Elan, growth in Perrigo's earnings, and debt repayment will reduce debt-to-EBITDA leverage (approximately 3.2x LTM 9/30/13 incorporating Moody's standard adjustments and pro forma for the Elan acquisition) to a mid 2x range by the end of calendar 2014. Perrigo is acquisitive and this creates event risk. Acquisitions can shift the asset risk profile, create integration/execution challenges, and lead to higher debt, but will also continue to increase diversity and build much-needed scale. Perrigo's projected cash flow and 2.0x leverage target create the capacity and willingness to maintain moderate leverage while allowing for continued re-investment in growth initiatives. The rating also reflects the intensely competitive operating environment -- including the presence of larger and better capitalized players, customer concentration - including the approximate 19% of revenue generated from Wal-Mart - that creates potential pricing pressure, and limited geographic diversity relative to large global peers with roughly 81% of revenue generated in the US.
Perrigo Company Limited is a newly formed legal entity created to facilitate the company's acquisition of Elan. The company intends to change its name to Perrigo Company plc following completion of the Elan acquisition. Note proceeds will be placed into escrow pending completion of the Elan acquisition and the escrowed cash will secure the notes. If the acquisition is not completed by April 29, 2014 (or such later time as specified in the indenture), Perrigo must redeem the notes for 101% of par plus accrued interest. Perrigo and Elan shareholders are voting whether to approve the merger on November 18, 2013 and Perrigo expects the acquisition to close by the end of 2013.
Moody's assumes in Perrigo's Baa3 ratings that the Elan acquisition will close, in which case the proposed notes will be senior unsecured obligations of Perrigo with guarantees from certain subsidiaries that are also guarantors of the company's unrated credit facilities, which consist of a $600 million revolver and $1 billion of term loans. The guarantees on the notes and Perrigo's credit facilities will be released in two years if the company maintains certain credit ratings. A guarantee release would create structural subordination to operating company liabilities, but not affect the relative priority between the notes and credit facilities, which would remain pari passu unsecured obligations. Moody's believes such an unguaranteed structure is more typical of investment-grade rated issuers and does not expect that the guarantee release alone would affect Perrigo's ratings in the absence of other changes in the fundamental credit profile.
The limitation on liens in the proposed notes is less restrictive than for Perrigo's credit facilities. Moody's anticipates that the notes and credit facilities will remain unsecured, but the limitation on liens differences could result in a weaker recovery for the notes than the credit facilities in a distress scenario. In particular, the limitation on liens in the notes applies only to Principal Properties with a permitted lien carve out of 15% of Consolidated Net Tangible Assets (as defined) that Moody's estimates will initially be approximately $290 million. The credit facility limitation on liens covers substantially all assets and has a lower permitted lien carve out of 7.5% of Consolidated Total Tangible Assets (as defined) that Moody's estimates will initially be approximately $210 million. Credit facility lenders could, therefore, obtain a lien on a meaningful share of Principal Properties and on all assets other than Principal Properties without providing that collateral to the notes.
Moody's expects to withdrawal existing Perrigo Company's ratings upon completion of the acquisition including the existing Baa3 rating on its $600 million senior unsecured notes due 2023. Perrigo Company launched a tender offer to redeem the 2023 notes as part of the Elan acquisition financing, and would become a subsidiary of Perrigo Company Limited if the acquisition closes.
The stable rating outlook reflects Moody's expectation that Perrigo will reduce debt-to-EBITDA leverage (incorporating Moody's standard adjustments) to a mid 2x range by the end of calendar 2014 through growth in Tysabri royalties, continued expansion of Perrigo's earnings and debt repayment. Moody's expects that Perrigo will maintain a good liquidity position including sizable free cash flow, a manageable maturity profile and sufficient headroom under its financial maintenance covenants.
Perrigo's ratings could be upgraded if it materially increases its scale and sustains debt-to-EBITDA leverage below 2x. Moody's would also look for more stability in the operating profile, clarity around the company's future acquisition strategy, and a track record of maintaining a balanced approach to shareholder distributions, re-investment and conservative balance sheet management.
Perrigo's ratings could be downgraded if the company materially changes its operating risk profile by increasing its new branded pharmaceutical development activities without reducing leverage. Moody's could also lower Perrigo's ratings if the company's financial performance deteriorates, or the company pursues debt-funded acquisitions or shareholder distributions such that debt-to-EBITDA approaches 3.5x. Unfavorable regulatory developments, material issues related to product liability, or a deterioration of liquidity could contribute to a downgrade.
Please see the credit opinion on www.moodys.com for additional information on Perrigo's credit ratings.
The principal methodology used in this rating was Global Packaged Goods published in June 2013. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.
Ratings Assigned to Perrigo Company Limited
- Senior Unsecured Regular Bond/Debenture, at Baa3
RATINGS RATIONALE
Perrigo's Baa3 senior unsecured ratings reflect its attractive growth prospects for store brand and generic pharmaceutical products, strong and stable EBITDA margins in the low 20% range, good free cash flow, and commitment to a conservative 2x leverage target (as defined in the company's credit agreement). Moody's projects that the step-up in Tysabri royalties held by Elan, growth in Perrigo's earnings, and debt repayment will reduce debt-to-EBITDA leverage (approximately 3.2x LTM 9/30/13 incorporating Moody's standard adjustments and pro forma for the Elan acquisition) to a mid 2x range by the end of calendar 2014. Perrigo is acquisitive and this creates event risk. Acquisitions can shift the asset risk profile, create integration/execution challenges, and lead to higher debt, but will also continue to increase diversity and build much-needed scale. Perrigo's projected cash flow and 2.0x leverage target create the capacity and willingness to maintain moderate leverage while allowing for continued re-investment in growth initiatives. The rating also reflects the intensely competitive operating environment -- including the presence of larger and better capitalized players, and customer concentration - including the approximate 19% of revenue generated from Wal-Mart - that creates potential pricing pressure. The rating also reflects limited geographic diversity relative to large global peers with roughly 81% of revenue generated in the US.
Perrigo's Baa3 senior unsecured ratings reflect its attractive growth prospects for store brand and generic pharmaceutical products, strong and stable EBITDA margins in the low 20% range, good free cash flow, and commitment to a conservative 2x leverage target (as defined in the company's credit agreement). Moody's projects that the step-up in Tysabri royalties held by Elan, growth in Perrigo's earnings, and debt repayment will reduce debt-to-EBITDA leverage (approximately 3.2x LTM 9/30/13 incorporating Moody's standard adjustments and pro forma for the Elan acquisition) to a mid 2x range by the end of calendar 2014. Perrigo is acquisitive and this creates event risk. Acquisitions can shift the asset risk profile, create integration/execution challenges, and lead to higher debt, but will also continue to increase diversity and build much-needed scale. Perrigo's projected cash flow and 2.0x leverage target create the capacity and willingness to maintain moderate leverage while allowing for continued re-investment in growth initiatives. The rating also reflects the intensely competitive operating environment -- including the presence of larger and better capitalized players, customer concentration - including the approximate 19% of revenue generated from Wal-Mart - that creates potential pricing pressure, and limited geographic diversity relative to large global peers with roughly 81% of revenue generated in the US.
Perrigo Company Limited is a newly formed legal entity created to facilitate the company's acquisition of Elan. The company intends to change its name to Perrigo Company plc following completion of the Elan acquisition. Note proceeds will be placed into escrow pending completion of the Elan acquisition and the escrowed cash will secure the notes. If the acquisition is not completed by April 29, 2014 (or such later time as specified in the indenture), Perrigo must redeem the notes for 101% of par plus accrued interest. Perrigo and Elan shareholders are voting whether to approve the merger on November 18, 2013 and Perrigo expects the acquisition to close by the end of 2013.
Moody's assumes in Perrigo's Baa3 ratings that the Elan acquisition will close, in which case the proposed notes will be senior unsecured obligations of Perrigo with guarantees from certain subsidiaries that are also guarantors of the company's unrated credit facilities, which consist of a $600 million revolver and $1 billion of term loans. The guarantees on the notes and Perrigo's credit facilities will be released in two years if the company maintains certain credit ratings. A guarantee release would create structural subordination to operating company liabilities, but not affect the relative priority between the notes and credit facilities, which would remain pari passu unsecured obligations. Moody's believes such an unguaranteed structure is more typical of investment-grade rated issuers and does not expect that the guarantee release alone would affect Perrigo's ratings in the absence of other changes in the fundamental credit profile.
The limitation on liens in the proposed notes is less restrictive than for Perrigo's credit facilities. Moody's anticipates that the notes and credit facilities will remain unsecured, but the limitation on liens differences could result in a weaker recovery for the notes than the credit facilities in a distress scenario. In particular, the limitation on liens in the notes applies only to Principal Properties with a permitted lien carve out of 15% of Consolidated Net Tangible Assets (as defined) that Moody's estimates will initially be approximately $290 million. The credit facility limitation on liens covers substantially all assets and has a lower permitted lien carve out of 7.5% of Consolidated Total Tangible Assets (as defined) that Moody's estimates will initially be approximately $210 million. Credit facility lenders could, therefore, obtain a lien on a meaningful share of Principal Properties and on all assets other than Principal Properties without providing that collateral to the notes.
Moody's expects to withdrawal existing Perrigo Company's ratings upon completion of the acquisition including the existing Baa3 rating on its $600 million senior unsecured notes due 2023. Perrigo Company launched a tender offer to redeem the 2023 notes as part of the Elan acquisition financing, and would become a subsidiary of Perrigo Company Limited if the acquisition closes.
The stable rating outlook reflects Moody's expectation that Perrigo will reduce debt-to-EBITDA leverage (incorporating Moody's standard adjustments) to a mid 2x range by the end of calendar 2014 through growth in Tysabri royalties, continued expansion of Perrigo's earnings and debt repayment. Moody's expects that Perrigo will maintain a good liquidity position including sizable free cash flow, a manageable maturity profile and sufficient headroom under its financial maintenance covenants.
Perrigo's ratings could be upgraded if it materially increases its scale and sustains debt-to-EBITDA leverage below 2x. Moody's would also look for more stability in the operating profile, clarity around the company's future acquisition strategy, and a track record of maintaining a balanced approach to shareholder distributions, re-investment and conservative balance sheet management.
Perrigo's ratings could be downgraded if the company materially changes its operating risk profile by increasing its new branded pharmaceutical development activities without reducing leverage. Moody's could also lower Perrigo's ratings if the company's financial performance deteriorates, or the company pursues debt-funded acquisitions or shareholder distributions such that debt-to-EBITDA approaches 3.5x. Unfavorable regulatory developments, material issues related to product liability, or a deterioration of liquidity could contribute to a downgrade.
Please see the credit opinion on www.moodys.com for additional information on Perrigo's credit ratings.
The principal methodology used in this rating was Global Packaged Goods published in June 2013. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.
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