TEXT-S&P rates Patheon credit facility 'B+'

Nov 8 - Overview
-- U.S. pharmaceutical contract manufacturer Patheon Inc. recently
announced a plan to acquire Banner Pharmacaps from VION N.V. for $255 million.
-- Patheon intends to fund the purchase through a new $565 million term
loan B and a new $85 million revolver, undrawn at close, which will also
refinance existing debt.
-- We are affirming our 'B+' corporate credit rating. We are also
assigning the company's new senior secured credit facility our 'B+'
issue-level rating with a recovery rating of '4'.
-- The rating outlook is negative, reflecting integration risk.

Rating Action
On Nov. 8, 2012, Standard & Poor's Ratings Services affirmed its 'B+'
corporate credit rating on Research Triangle Park, N.C.-based pharmaceutical
contract manufacturer Patheon Inc. following the company's announcement that
it will issue new debt to fund an acquisition and to repay existing debt. The
rating outlook remains negative.

At the same time, we assigned the company's proposed new senior secured credit
facilities (consisting of a $565 million term loan B and $85 million revolver)
our 'B+' issue-level rating with a recovery rating of '4', indicating our
expectation for average (30% to 50%) recovery in the event of a payment
default.

Rationale
We continue to view the company's financial risk profile as "aggressive,"
despite the increase in debt. While we measure pro forma leverage at 5.4x, pro
forma for the acquisition debt and inclusion of EBITDA from Banner, but
excluding pro forma cost savings or acquisition synergies, we expect that
leverage will decline to the low-4x range by the end of fiscal-year 2013. Free
cash flow is expected to be positive. We continue to view the business profile
as "weak," which reflects the company's inconsistent but improving operating
performance in the competitive and highly fragmented pharmaceutical contract
manufacturing business, as well as the company's need to integrate Banner's
operations following the acquisition. While the Banner acquisition adds some
scale, we do not believe that the improvement in scale alone warrants a
stronger business risk score.

Patheon's new management has been successful in rationalizing capacity and
signing new business, and in leveraging revenue growth into gross margin
improvement. While these improvements have allowed Patheon to generate modest
positive free cash flow in the second half of 2012, we still expect full-year
discretionary cash flow to be negative due to heavy consulting spending in the
first half of the year. Pro forma the acquisition and debt refinancing,
adjusted leverage is about 5.4x, inconsistent with our assessment of an
aggressive financial risk profile. However, we expect Patheon to reduce
leverage to the low-4x level over the next year and to generate funds from
operations to total debt in the low double digits in fiscal-year 2013 and
modestly positive free cash flow after about $55 million in expected capital
spending. This expectation reflects our belief that the company will generate
mid-single-digit pro forma revenue growth in fiscal-year 2013, and that EBITDA
margins will expand about 250 basis points next year, resulting in 2013 EBITDA
of more than $140 million. This largely reflects the full-year impact of the
operational improvements realized in the second half of fiscal-year 2012.

Our assessment of Patheon's business risk profile as weak reflects our view
that the CMO industry is capital intensive, highly fragmented, and
competitive; that the company has a short track record in generating positive
free cash flow; and that the company needs to quickly integrate the Banner
acquisition while completing its internal operating improvement plan. In
addition, while the pro forma entity will be the No. 2 player in softgels
behind industry leader Catalent Pharma, softgels represent a relatively small
portion of the broader solid oral dosage market. These factors are only
partially offset by Patheon's positioning as a market leader in each of its
two existing major market segments and its well-established customer
relationships (including relationships with 18 of the 20 largest global
pharmaceutical companies and nine of the 10 largest global biotechnology
companies). Our assessment also considers the recent improvement in revenues
and operating margins, the diversity of the company's service offerings, and
our expectation that long-term demand for Patheon's services will continue to
grow at a low- to mid-single-digit rate.

Liquidity
Our assessment of Patheon's liquidity profile as "adequate" incorporates the
following expectations and assumptions:
-- Sources of cash should exceed mandatory uses over the next 12 to 24
months.
-- Sources of cash include about $85 million in availability under the
new revolving credit line and about $60 million in expected funds from
operations.
-- Ongoing uses of cash include minimal working capital usage and about
$55 million in annual capital expenditures (about half of which is
expansionary).
-- Following the refinancing, Patheon has no near-term debt maturities
and no financial maintenance covenants.
-- We expect liquidity to exceed needs, even if EBITDA declines by 20%.
-- Given the company's cash balances and available revolver capacity, we
do not believe Patheon can absorb, without refinancing, a high-impact,
low-probability event.

Recovery analysis
We are assigning Patheon's proposed new senior secured credit facilities our
'B+' issue-level rating with a recovery rating of '4', indicating our
expectation for average (30% to 50%) recovery in the event of payment default.

Outlook
Prior to the acquisition announcement, our negative outlook reflected our view
that Patheon was in the early stages of an operating turnaround, and that 2012
would be a transformative year for the company. While Patheon has now produced
two quarters of improved operating results, the company has now introduced new
elements of business risk with the Banner acquisition. While the acquisition
adds some business diversity, we view this acquisition as transformative, and
debt levels are increasing at a somewhat fragile period in the company's
recovery.

While we expect Patheon to generate over 30% pro forma EBITDA growth in
fiscal-year 2013, this forecast is not without risks, particularly because the
company must now integrate newly acquired Banner while at the same time
completing its internal turnaround plan. If Patheon is able to manage the
integration and to grow revenues in the low to mid-single digits while
expanding margins around 100 basis points and generating positive free
operating cash flow, we could consider an outlook revision to stable.

We could consider a lower rating if Patheon is unable to reduce leverage and
generate positive free operating cash flow over the next four quarters. We
believe that this could occur if the company experiences any difficulties in
integrating the Banner acquisition, or if the company is unable to sustain the
operating improvements realized over the last two quarters, resulting in
margin deterioration.

Related Criteria And Research
-- Business Risk/Financial Risk Matrix Expanded, Sept. 18, 2012
-- Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011
-- Criteria Guidelines For Recovery Ratings, Aug. 10, 2009
-- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008
-- 2008 Corporate Criteria: Rating Each Issue, April 15, 2008
-- 2008 Corporate Criteria: Ratios And Adjustments, April 15, 2008

Ratings List
Ratings Affirmed

Patheon Inc.
Corporate Credit Rating B+/Negative/--
Senior secured notes B+
Recovery Rating 4
Senior secured revolving loan BB
Recovery Rating 1

New Rating

Patheon Inc.
Senior Secured
$565M fltg rate term B loan due 2019 B+
Recovery Rating 4
$85M fltg rate revolver loan due 2017 B+
Recovery Rating 4

Complete ratings information is available to subscribers of RatingsDirect on
the Global Credit Portal at www.globalcreditportal.com. All ratings affected
by this rating action can be found on Standard & Poor's public Web site at
www.standardandpoors.com. Use the Ratings search box located in the left
column.