Here We Go .. On Concordia's Bonds, Terrible News For Equity New York, November 14, 2016 -- Moody's Investors Service, ("Moody's") downgraded the ratings of Concordia International Corp. ("Concordia") including the Corporate Family Rating to Caa1 from B3 and the Probability of Default Rating to Caa1-PD from B3-PD. Moody's also downgraded the senior secured rating to B2 from B1, and the senior unsecured ratings to Caa3 from Caa2. At the same time, Moody's also affirmed the SGL-2 Speculative Grade Liquidity Rating. The rating outlook is negative.
"The downgrade follows continued weakness in the business, an uncertain competitive environment, and an unclear and challenging path towards deleveraging," said Jessica Gladstone, Moody's Senior Vice President. "Given the significant step-down in revenue and EBITDA in the third quarter of 2016 due to pressures in the North America business, Moody's now forecasts that adjusted debt/EBITDA will rise to between 8x -- 9x (including Moody's standard adjustments) in 2017. Moody's anticipates that Concordia's liquidity will remain good over the next 12-18 months, and notes that the company has no major debt maturities until 2021. However, uncertainty around the company's ability to grow earnings over time raises the risk that the company's capital structure is unsustainable."
Ratings Downgraded:
Corporate Family Rating, to Caa1 from B3
Probability of Default Rating, to Caa1-PD from B3-PD
Senior Secured Ratings, to B2 (LGD2) from B1 (LGD2)
Senior Unsecured Ratings, to Caa3 (LGD5) from Caa2 (LGD5)
Ratings affirmed:
Speculative Grade Liquidity Rating at SGL-2
The outlook on all ratings is negative
RATINGS RATIONALE
Concordia's Caa1 Corporate Family Rating reflects its very high financial leverage. Moody's estimates adjusted debt-to-EBITDA will be in excess of 8.0x over the next 12 months. 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 are in 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. With limited capital resources and limited ability to raise prices on legacy drugs, Moody's believes it will be difficult for Concordia to replace earnings that will be lost on existing products through acquisitions.
The rating is supported by the company's high profit margins, low cash taxes and low capital expenditures. This will enable it to generate positive free cash flow over the next 12-18 months despite its very high adjusted debt-to-EBITDA. The rating is also supported by the company's good product and geographic diversity, as well as Moody's expectation of good liquidity.
The Speculative Grade Liquidity Rating of SGL-2 is supported by cash of nearly $500 million following the October 2016 debt offering, as well as Moody's expectation for positive free cash flow over the next 12 months. These internal sources of cash will be sufficient to cover all debt maturities and contingent acquisition payments over the next 12 months. While the company has an undrawn $200 million revolving credit facility, Moody's believes access to it is limited to about $60 million. If the company uses more than $60 million of the revolver, a net secured leverage covenant would be tested. Moody's believes over the next 12 months, Concordia would not likely be in compliance with the covenant, if it were tested. There are no other financial covenants.
The B2 rating on the senior secured debt is two notches above the Caa1 Corporate Family Rating, supported by loss absorption provided by about $1.5 billion of unsecured debt. The rating on the unsecured notes is Caa3. This is one notch lower than the rating suggested by Moody's Loss Given Default Methodology. Moody's feels this is appropriate because of a potentially temporary reduction in the senior secured debt balance due to currency translation (a portion of the secured debt is denominated in British pounds).
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 declines in earnings could lead to a downgrade. Ratings could also be downgraded if, for any reason, Moody's believes Concordia's capital structure is becoming unsustainable.
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 7.0x.
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.
Concordia is a pharmaceutical company focused on generic and legacy products (i.e., those that have already substantially declined due to generic competition), and orphan drugs. Headquartered in Oakville, Ontario, Concordia reported revenues of US$836 million over the 12 months ended September 30, 2016.