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TEXT - Fitch rates Rottapharm SpA
December 21, 2012 / 5:16 PM / 5 years ago

TEXT - Fitch rates Rottapharm SpA

(The following statement was released by the rating agency)


Overview
     -- Italy-based health care group Rottapharm has raised EUR400 million of 
senior unsecured notes to refinance its upcoming debt maturities.
     -- We assess Rottapharm's business risk profile as "fair" and its 
financial risk profile as "aggressive."
     -- We are assigning our 'BB-' long-term corporate credit rating to 
Rottapharm and our 'BB-' issue rating to the senior note.
     -- The stable outlook reflects our view that Rottapharm's operational 
underperformance has bottomed out, and that the group will continue to 
generate positive cash flows. 
 
Rating Action
On Dec. 21, 2012, Standard & Poor's Ratings Services assigned its 'BB-' 
long-term corporate credit rating to Italy-based pharmaceuticals group 
Rottapharm SpA. The outlook is stable. 

At the same time, we assigned our 'BB-' issue rating to the EUR400 million 
senior unsecured notes due 2019 issued by Rottapharm Ltd. We also assigned a 
recovery rating of '3' to these notes, indicating our expectation of 
meaningful (50%-70%) recovery in the event of a payment default.

Rationale
The ratings on Rottapharm reflect our view of the group's "fair" business risk 
profile, supported by a profitable and diversified portfolio of products. 
However, 31% of these products are reimbursed and exposed to pricing pressure 
as a result of austerity measures being implemented in Europe. The ratings 
also reflect Rottapharm's "aggressive" financial risk profile, with Standard & 
Poor's-adjusted funds from operations (FFO) to debt of less than 20% and debt 
to EBITDA in the 3x-4x range, but resilient free cash flow generation. 

Our assessment of Rottapharm's business risk profile reflects the group's 
relatively small size, and its exposure to both southern Europe (about 47% of 
revenues) and changes in government reimbursement policies. We anticipate that 
austerity measures and cuts in public funding will put pressure on prices in 
Europe for the rest of 2012 and 2013. The group's sales and EBITDA declined in 
both 2010 and 2011, primarily reflecting unexpected cuts in reimbursement 
rates and disruptions to revenues in Thailand due to floods. These events have 
in our view reduced the group's visibility of future earnings.

Partly mitigating these weaknesses are Rottapharm's well-established brands 
and their positions in the niche semi-ethical (available both with and without 
prescription) and over-the-counter product categories. Clinical studies 
support the products' efficacy. This allows Rottapharm to charge premium 
prices, evident in the group's relatively strong operating margin of about 
28%. Furthermore, Rottapharm is continuing its strategy of transferring 
certain products to the nonreimbursement, self-payment, and semi-ethical 
categories, which currently account for about 70% of sales. This could prove 
beneficial to the group's profitability if it is able capitalize on its brand 
name and retain relationships with clients such as patients, doctors, and 
pharmacists. 

Additional support stems from Rottapharm's relatively well-diversified product 
portfolio, with the 10 top-selling products accounting for about one-half of 
the group's sales. Rottapharm's two largest markets--Italy and 
Germany--accounted for about 31% and 14% of 2011 revenues, respectively. We 
consider that favorable demographics, in particular aging populations, and 
good exposure to emerging markets (19% of revenues) should support 
Rottapharm's growth prospects over the medium to long term.

Under our base-case scenario, we anticipate that Rottapharm's sales will 
increase modestly in 2012 and 2013. Likewise, we anticipate that the group's 
EBITDA margin will remain at 28% in both years, in line with the margin in 
2011. Future growth will stem from the rollout of glucosamine in emerging 
markets, the expansion of the Saugella brand of personal hygiene products into 
Italy, and the expansion of Rottapharm's range of over-the-counter and generic 
drugs, which should improve its product mix and profitability. 

Our assessment of Rottapharm's financial risk profile takes into account our 
view that the group's adjusted FFO to debt will not improve significantly in 
2012. The group's adjusted debt-to-EBITDA ratio stood at 3.7x at year-end 2011 
and we estimate that its leverage ratio will peak at 3.8x at year-end 2012, 
when it establishes the new financial structure. We anticipate that 
Rottapharm's annual capital expenditure will not exceed EUR10 million and that 
this, together with the group's strong profitability and its cash conversion, 
will help it to generate strong free cash flow that we estimate will be about 
EUR75 million in 2013. We anticipate that Rottapharm will dedicate almost all of
its free cash flows to reducing net debt, except about EUR10 million that it 
will upstream as dividends to service the debt of its controlling shareholder, 
Fidim Srl. Fidim carried gross debt of about EUR240 million at year-end 2011.

Consequently, we consider that Standard & Poor's-adjusted leverage could 
decrease to about 3.4x at year-end 2013 and 3.0x at year-end 2014, subject to 
its dividend and acquisition policy. This would reflect the group's 
medium-term target of 2.0x-2.5x on a reported basis. Equally importantly, we 
take the view that EBITDA cash interest coverage will comfortably exceed 3.5x.

Liquidity
We consider Rottapharm's liquidity to be "adequate" as our criteria define the 
term. We base our liquidity assessment on the following factors:
     -- Rottapharm's liquidity sources (including cash, FFO, and an available 
credit facility) should comfortably exceed its uses by more than 1.2x over the 
next 12 months. Even if EBITDA were to decline by 15%-20%, we believe that net 
sources would remain positive.
     -- The group has a long-term debt maturity profile after the refinancing. 
The EUR400 million senior notes will mature in 2019.
     -- We anticipate that mandatory loan amortization of EUR30 million and
EUR20 
million in 2013 will be covered by free cash flows that we forecast will 
exceed EUR50 million per year. We anticipate that the group will maintain 
adequate headroom under its bank facilities. 
     -- Rottapharm currently has no available revolving credit facility, since 
the EUR100 million line with Mediobanca has been fully drawn but the maintenance
of cash in excess of EUR100 million mitigates this. 
 
Recovery analysis
The issue rating on the proposed EUR400 million senior unsecured notes due 2019 
(the notes), to be issued by Rottapharm Ltd., is 'BB-', in line with the 
preliminary corporate credit rating on Rottapharm. The recovery rating on the 
notes is '3', indicating our expectation of meaningful (50%-70%) recovery 
prospects in an event of default.

The issue and recovery ratings reflect our valuation of Rottapharm as a going 
concern, underpinned by our view that the group's product portfolio and 
established brand names would retain significant value at our simulated point 
of default. Recovery prospects are constrained by our view of the Italian 
insolvency regime as relatively unfavorable for creditors, and the unsecured 
nature of the notes. These factors lead us to a cap the recovery rating on the 
notes at '3' despite numerical coverage slightly in excess of 70%. 

We believe that the notes benefit from stronger structural protection than 
Rottapharm's bank debt by virtue of subsidiary guarantees granted to the notes 
that are not available to bank lenders. However, our view is that the relative 
advantage to noteholders will decrease over time because we assume that, by 
the time of our simulated point of default, a major part of the bank debt 
would have amortized, and so the notes would account for a large majority of 
the group's indebtedness.

All the group's debt facilities are unsecured, with the notes benefitting from 
guarantees representing about 88% and 82% of consolidated EBITDA and assets, 
respectively, as of June 30, 2012. The guarantees include one from Rottapharm. 
The unsecured bank debt does not benefit from these guarantees, with recourse 
for bank lenders limited to parent company Rottapharm. Although Rottapharm is 
a material operating entity in its own right, it accounts only for about 47% 
of consolidated EBITDA.

In our view, the documentation for the notes is weaker than the loan 
documentation. The loan benefits from maintenance covenants, whereas the notes 
benefit from incurrence covenants. Over time, we consider that this could lead 
to bank lenders achieving better terms, protection, or collateral than the 
noteholders in the event that Rottapharm breaches a maintenance covenant. A 
key protection for noteholders is that, according to the notes' documentation, 
if Rottapharm provides security interests to its creditors in the future, it 
must enter an intercreditor agreement to restore the pari passu ranking and 
sharing of enforcement proceeds of any security it grants. We note, however, 
that the bank debt documentation does not include a similar clause.

To calculate recoveries, we simulate a default scenario that assumes a 
potential combination of the following:
     -- A decline in revenues in the reimbursed prescription drugs segment, 
due to austerity measures in Europe reducing prices; and 
     -- Lower growth in the semi-ethical drugs segment, stemming from 
shrinking consumer spending in most European markets and increasing 
competition for some key products. 
 
This hypothetical scenario leads to a default in 2016, with EBITDA declining 
to about EUR72 million. We believe that if Rottapharm were to default, 
reorganization would yield greater value for lenders than liquidation. We 
value the business on a going-concern basis, based on a market-multiple 
approach.

We estimate the gross stressed enterprise value at the simulated point of 
default at about EUR397 million, using a 5.5x EBITDA multiple. After deducting 
about EUR60 million of priority liabilities--comprising enforcement costs and a 
part of the unfunded pension deficit--from our gross stressed enterprise 
value, we estimate that the outstanding unsecured notes would amount to about 
EUR455 million, including prepetition interest, and that coverage would 
therefore exceed 70%. 

However, in line with our criteria for rating unsecured debt, we cap our 
recovery rating on the notes at '3'.

Outlook
The stable outlook reflects our view that Rottapharm's operational 
underperformance has bottomed out and that the group will continue to generate 
positive cash flows. We expect EBITDA to stabilize in 2012 and recover from 
2013. The group's solid portfolio and its presence in emerging markets should 
fuel future growth and offset possible additional pricing pressure in southern 
Europe. We assume low-single-digit revenue growth over the next 12-18 months 
and believe that the group's operating margin will remain resilient to 
possible pressure on the pricing of some of its prescription drugs.

We anticipate a steady improvement of the group's debt protection measures on 
the back of healthy free cash flows that we estimate will exceed EUR50 million 
every year on a sustainable basis. 

We view adjusted FFO to debt of more than 12% as commensurate with the 'BB-' 
rating. Consequently, anything less than this would place the ratings would 
under pressure. Rating pressure could also arise if the group's sales and 
profitability deteriorated following last year's underperformance. 

Ratings upside is contingent on adjusted FFO to debt in excess of 20%, as well 
as on evidence of growth in the group's EBITDA after the decline of 2011 and 
the stabilization we anticipate in 2012.

Related Criteria And Research
All articles listed below are available on RatingsDirect on the Global Credit 
Portal, unless otherwise stated.
     -- Methodology: Business Risk/Financial Risk Matrix Expanded, Sept. 18, 
2012
     -- Methodology And Assumptions: Liquidity Descriptors For Global 
Corporate Issuers, Sept. 28, 2011 
     -- Criteria Guidelines For Recovery Ratings On Global Industrial Issuers' 
Speculative-Grade Debt, Aug. 10, 2009
     -- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008
     -- 2008 Corporate Criteria: Ratios And Adjustments, April 15, 2008 
 
Ratings List
New Ratings

Rottapharm SpA 
Corporate Credit Rating            BB-/Stable/-- 
 
Rottapharm Ltd.
Senior Unsecured Debt*             BB
Recovery Rating                    3
 
*guaranteed by Rottapharm SpA

 (Caryn Trokie, New York Ratings Unit)

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