TEXT - S&P rates Quintiles Transnational Corp term loan

Tue Dec 11, 2012 5:25pm EST

Overview
     -- Research Triangle Park, N.C.-based contract services provider 
Quintiles Transnational Corp. is issuing $1,975 million in new B-2 term loans 
to refinance its existing term loan B.
     -- We are assigning the new term loan our 'BB-' issue-level rating with a 
'4' recovery rating (the same as the loans that are being refinanced).
     -- The stable rating outlook reflects our expectation that growing EBITDA 
and continued free cash flow generation will result in adjusted leverage that 
will decline to the high-4x range by year end and that the company will 
continue to operate with debt to EBITDA of less than 5x.
 
Rating Action
On Dec. 11, 2012, Standard & Poor's Ratings Services affirmed its 'BB-' 
corporate credit rating on Research Triangle Park, N.C.-based contract 
services provider Quintiles Transnational Corp.

We also affirmed our 'BB-' issue-level rating and '4' recovery rating (30% to 
50% recovery expectation) on that entity's revolver and incremental term loan, 
and our 'B' issue-level rating and '6' recovery rating (0% to 10% recovery 
expectation) on the holding company's term loan.

At the same time, we assigned Quintiles Transnational Corp.'s proposed $1,975 
million term loan B-2 due 2018 our 'BB-' issue-level rating, with a recovery 
rating of '4', indicating our expectation for average (30% to 50%) recovery 
for lenders in the event of a payment default. The company will use proceeds 
from the loan to refinance its existing term loan B. The new loans reduce 
interest expense and provide for further pricing step downs if Quintiles 
completes an initial public offering. However, we have no information from the 
company to suggest that an offering is imminent.

Rationale
The ratings on Quintiles Transnational Corp. reflect the company's 
"aggressive" financial policy, characterized by pro forma lease-adjusted debt 
to EBITDA slightly above 5x and a shareholder-friendly financial policy that 
has resulted in two debt-financed dividends this year. The ratings also 
reflect Quintiles' "satisfactory" business risk profile, supported by the 
company's industry-leading market position in the growing contract research 
(CRO) industry. 

Quintiles' aggressive financial risk profile reflects a financial policy that 
uses excess cash and debt capacity for dividends. Pro forma for the October 
2012 debt issuance, debt to EBITDA as of Sept. 30, 2012, was 5x, reflecting in 
part the addition of $475 million of new debt in 2012 to fund shareholder 
distributions. Although we believe EBITDA growth will result in declining debt 
leverage over time, we believe Quintiles will use its growing excess debt 
capacity for additional dividends and, absent a change in capital structure or 
financial policy, will maintain leverage in the 4x to 5x range over the longer 
term.

We expect Quintiles to generate at least mid- to high-single-digit revenue 
growth in 2013, based on strong industry growth trends and Quintiles' 2012 
backlog growth. We believe that stable EBITDA margins and this level of 
revenue growth will allow EBITDA to expand and reduce leverage to about 4.5x 
by the end of 2013, and improve funds from operations to total debt to about 
15% next year.

Quintiles' position as the largest CRO providing services to the 
pharmaceutical and biotechnology industries is a crucial factor supporting the 
satisfactory business risk profile. We expect industry conditions to continue 
to improve, which we believe will result in mid- to high-single-digit revenue 
and EBITDA growth in 2013. We believe that Quintiles can sustain this level of 
organic growth over the intermediate term based on our expectation for 
increased outsourcing by larger pharmaceutical companies, modest increases in 
research and development (R&D) budgets as pharmaceutical and biotechnology 
companies seek to refill product pipelines, and our belief that an increasing 
amount of drug approvals will come from smaller pharmaceutical and 
biotechnology companies. These smaller companies often lack the infrastructure 
to perform certain clinical development services internally. At the same time, 
we expect Quintiles to benefit from an ongoing trend among large 
pharmaceutical companies toward forming strategic partnerships with a smaller 
number of large, global CROs. Over time, we expect that this will shift some 
market share from the smaller CROs to the largest global players like 
Quintiles.

The company offers an array of services within its two key segments--the 
clinical development and consulting segment and the commercial solutions 
segment--giving it some revenue diversity. However, Quintiles still depends on 
pharmaceutical industry R&D spending. While Quintiles' scale and focus on the 
late-stage segment of the market is a mitigating factor, contract cancelations 
remain a risk because sponsors (or, in some cases, regulators) can cancel 
trials with very little notice.

Liquidity
We view Quintiles' liquidity as "strong." Sources of cash are likely to exceed 
mandatory uses of cash over the next 12 months. Our assessment of Quintiles' 
liquidity profile incorporates the following expectations and assumptions:
     -- Our expectation that liquidity sources will exceed uses by at least 
1.5x over the next 12 months.
     -- If EBITDA declines by 50%, we expect liquidity sources to continue 
exceeding uses.
     -- Sources of cash include $400 million in cash, full availability under 
the $300 million revolving credit facility, and our expectation of about $400 
million in 2013 funds from operations;
     -- Uses of cash include modest working capital usage and about $200 
million in annual capital expenditures;
     -- Quintiles faces no near term debt maturities, and;
     -- We we believe Quintiles can absorb, without refinancing, high-impact, 
low-probability events.
 
Recovery analysis
For the complete recovery analysis, please see the recovery report to be 
published following this report on RatingsDirect.

Outlook
Our stable rating outlook on Quintiles reflects our expectation that it will 
maintain its market-leading position in an industry that we expect to have 
solid long-term growth prospects. While adjusted debt to EBITDA is currently 
around 5x, we expect debt leverage to be around 4.5x by the end of 2013 due to 
EBITDA growth. We also expect funds from operations to total debt to be 
sustained in the mid-teens.

Despite our belief that Quintiles will generate meaningful cash flow over the 
next year, we expect that the company will direct its cash flow toward growth 
objectives and further shareholder dividends. If the company demonstrates a 
commitment to directing free cash flow toward repaying debt and reduces 
leverage to around 3.5x, we could raise the rating. However, we view this as 
unlikely under the current ownership structure.

We could lower the rating if the company adopts a more aggressive financial 
policy, resulting in debt financed dividends that increase leverage to above 
5x on a sustained basis. We would also consider a lower rating if the industry 
were to reenter a steep downturn and Quintiles suffered a significant 
operating shortfall that causes EBITDA to decline and debt leverage to rise 
and remain above 5x.

Related Criteria And Research
     -- Business Risk/Financial Risk Matrix Expanded, Sept. 18, 2012
     -- Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011
     -- 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

Quintiles Transnational Corp.
 Corporate Credit Rating                  BB-/Stable/--      
 Senior Secured                           BB-                
   Recovery Rating                        4

Quintiles Transnational Holdings Inc.
 Senior Secured                           B                  
   Recovery Rating                        6

New Rating

Quintiles Transnational Corp.
 Senior Secured
  $1.975B term B-2 bank loan due 2018     BB-                
   Recovery Rating                        4