TEXT - S&P revises inVentiv Health outlook to stable

Mon Dec 10, 2012 3:45pm EST

Related Topics

Overview
     -- U.S. pharmaceutical outsourced service provider inVentiv Health Inc. 
is issuing $550 million new senior secured notes, which together with a $50 
million equity contribution from its financial sponsor, is being used to repay 
$500 million in term debt and $97.5 million in revolver borrowings.
     -- At the same time, the company is proposing an amendment to its senior 
secured credit facilities that will remove financial covenants, which we 
expect will improve liquidity by ensuring unrestricted access to the company's 
revolver.
     -- We are revising our 'B-' rating outlook to stable from negative. At 
the same time, we are assigning the proposed senior secured notes our 'B' 
issue-level rating with a recovery rating of '2'. We are also lowering our 
issue-level rating on inVentiv's existing senior secured credit facilities to 
'B' from 'B+' and revising our recovery rating on the existing senior secured 
debt to '2' from '1'.
     -- Our stable rating outlook on inVentiv reflects our expectation that 
low-single-digit organic revenue growth will be insufficient to reduce 
leverage meaningfully from current levels, even with our base-case expectation 
of improvement in EBITDA margin.
 
Rating Action
On Dec. 10, 2012, Standard & Poor's Ratings Services affirmed its 'B-' 
corporate credit rating on Burlington, Mass.-based contract research 
organization (CRO) inVentiv Health Inc.

At the same time, we revised our rating outlook to stable from negative.

We also assigned the company's proposed $550 million senior secured notes our 
'B' issue-level rating, with a recovery rating of '2', indicating our 
expectation for substantial (70%-90%) recovery for noteholders in the event of 
a payment default.

At the same time, we lowered our issue-level rating on inVentiv's existing 
senior secured credit facilities to 'B' from 'B+' and revised our recovery 
rating on this debt to '2' (70%-90% recovery expectation) from '1' (90%-100% 
recovery expectation).

Our 'CCC' issue-level rating on the company's unsecured debt is unchanged.

Rationale
Our outlook revision reflects our belief that inVentiv's liquidity profile 
will be meaningfully stronger following the repayment of $97.5 million of 
revolver borrowings and the removal of financial covenants that we thought 
could constrain revolver access next year.

We continue to view the company's financial risk profile as "highly leveraged" 
and its business risk profile as "weak." The highly leveraged financial risk 
profile is dominated by adjusted leverage that we expect to remain above 7x 
for the next two years and our expectation that discretionary cash flow could 
be negative (and will be no better than modestly positive) in 2013. The weak 
business risk profile reflects its narrow focus on one industry, 
pharmaceutical contract services, the fragmented nature of the clinical 
contract research industry, the challenges inVentiv faces in integrating its 
recent acquisitions, and the highly competitive nature of both the CRO and 
commercial services businesses.

We revised our 2012 expectations in June to reflect lower-than-anticipated 
revenue growth and slower-than-expected margin expansion. We expect inVentiv 
to achieve our revised low-double-digit revenue growth target, reflecting the 
effect of acquisitions. Without acquisitions, we believe revenue growth would 
be minimal, reflecting project delays in the clinical business and modest 
revenue declines in the commercial segment due to weakness in three small 
business lines. We expect full-year EBITDA of about $200 million (after adding 
back restructuring expense, but excluding the pro forma impact of acquisitions 
or recent cost-saving actions). However, we expect year-end leverage to exceed 
8x and funds from operations are, as expected, in the low single digits as a 
percentage of total debt.

We expect inVentiv to generate low-single-digit revenue growth in 2013, 
reflecting new clinical business wins in 2012 as well as the restart of a 
previously delayed project. This forecast also assumes low-single-digit 
revenue growth in the commercial segment, with revenue from acquired digital 
communications businesses and the Asian commercial selling operations 
offsetting flat revenue growth in some mature businesses. We also expect about 
150 basis points in EBITDA margin expansion, which includes both the full-year 
impact of cost cutting begun in 2012 and lower restructuring and consulting 
expenses relative to the current year. Our EBITDA growth forecasts also 
reflect our assumption that one-time spending on restructuring will normalize 
at about $5 million per year in 2013. Given inVentiv's heavy interest burden 
and modest capital spending, we expect funds from operations to total debt to 
remain in the low single digits and discretionary cash flow for 2013 to be 
minimal.

The highly leveraged financial risk profile reflects inVentiv's pro forma 
adjusted leverage of more than 7x and funds from operations (FFO) to total 
debt in the low single digits. Despite our expectation for EBITDA expansion, 
we expect leverage to remain high at over 7x in 2013. The high leverage 
results from inVentiv's leveraged buyout in 2010 and three significant 
debt-financed acquisitions in 2011. The company also drew on its revolver to 
complete two smaller, tuck-in acquisitions in the first quarter of 2012 
(although these drawings will be repaid as a result of this transaction).

While inVentiv has been a consolidator in the CRO industry, the company and 
its peers are much smaller than the pharmaceutical companies they service, 
which we believe limits pricing power. While the CRO business could benefit 
from scale over the longer term, inVentiv is still working to integrate its 
2012 acquisitions. While inVentiv is a major player in the CSO business, and 
recent acquisitions add exposure to higher-growth areas of digital 
communications, we believe the commercial segment will remain very 
competitive, with limited barriers to entry. 

inVentiv has been highly acquisitive over the last two years, and the company 
is still working toward fully integrating its 2012 acquisitions and improving 
margins. Moreover, the CRO industry is highly competitive and fragmented and 
inVentiv competes against larger, better-established competitors in a slowly 
recovering industry. To date, the largest competitors have disproportionately 
benefited from the industry recovery, a trend that we believe may continue. 
Management's appetite for growth through acquisitions remains, and we believe 
it will continue making smaller, tuck-in acquisitions. 

Liquidity
Pro forma the new debt issuance, we are revising inVentiv's liquidity 
descriptor to "adequate" from "less than adequate." Our revision primarily 
reflects our belief that the revolver repayment, combined with the lack of 
covenants following the amendment, will ensure full access to the revolving 
facility(we had previously thought access would be limited by covenants we 
expected to be tight in 2013).

Our assessment of the company's liquidity profile also incorporates the 
following expectations and assumptions:
     -- We believe sources of cash will exceed mandatory uses over the next 
12-24 months by around 1.2x; 
     -- Sources of liquidity include about $44 million in cash, full 
availability under the $130 million revolver, and about $40 million in 
expected 2012 FFO; uses include about $40 million in capital expenditures, 
modest working capital usage, and $5 million in annual amortization; 
     -- We expect negative discretionary free cash flows this year and only 
modestly positive free cash flow in 2013, but availability under the line of 
credit supplements sources; 
     -- Following the amendment, inVentiv's credit facilities will be covenant 
light, ensuring access to the revolver; and
     -- We do not believe inVentiv can absorb, without refinancing, 
high-impact, low-probability events.
 
Recovery analysis
For the complete recovery analysis, please see the recovery report on 
inVentiv, to be published following this report on RatingsDirect. 

Outlook
Our stable rating outlook on inVentiv reflects our expectation that 
low-single-digit organic revenue growth will be insufficient to reduce 
leverage meaningfully from current levels, even with our base-case expectation 
of improvement in EBITDA margin. However, following the amendment and debt 
refinancing, inVentiv will be relieved of covenant pressures that we had 
previously expected could impede access to the revolver. In our view, this 
provides the company with some breathing room to execute on its restructuring 
plans.

We could also revise the outlook to negative or lower our rating if access to 
the revolver is restricted by tighter than expected covenants, or if the 
company continues to generate negative free operating cash flow, requiring 
revolver draws. In our view, this could happen if the CRO industry experiences 
another downturn that results in revenue declines and pushes inVentiv's EBITDA 
margins below 10%. A higher rating would require inVentiv to reduce leverage 
to around 5x and improve funds from operations to total debt to around 12%, 
which we think is unlikely in the near term.

Related Criteria And Research
     -- Business Risk/Financial Risk Matrix Expanded, Sept. 18, 2012
     -- Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011
     -- Use Of CreditWatch And Outlooks, Sept. 14, 2009
     -- 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; Outlook Revision
                                        To                 From
inVentiv Health Inc.
 Corporate Credit Rating                B-/Stable/--       B-/Negative/--

Downgraded; Recovery Rating Revised
                                        To                 From
inVentiv Health Inc.
 Senior Secured                         B                  B+
   Recovery Rating                      2                  1

New Rating

inVentiv Health Inc.
 Senior Secured
  $550M 1st lien nts due 2017           B                  
   Recovery Rating                      2                  

Ratings Affirmed

inVentiv Health Inc.
 Senior Unsecured                       CCC                
  Recovery Rating                       6
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