(The following was released by the rating agency)
-- Chilean pharmaceutical company CFR Pharmaceuticals S.A. (CFR) continues to grow through acquisitions in Latin America, especially in investment-grade countries. The company plans to use debt to finance its most recent acquisition in Colombia for about $560 million.
-- We are assigning our ‘BB+’ corporate credit rating to CFR. We are also assigning our ‘BB+’ rating to the proposed up to $300 million mid-to-long-term senior unsecured notes issued by CFR International SpA, a subsidiary of CFR.
-- The proposed notes are expected to be fully and unconditionally guaranteed by CFR and its main operating subsidiaries.
-- The stable outlook reflects our expectations that the company will improve its leverage levels and profitability measures once it consolidates its recent acquisition, while maintaining its good market position in Latin America.
On Nov. 21, 2012, Standard & Poor’s Ratings Services assigned its ‘BB+’ corporate credit rating to Chile-based CFR Pharmaceuticals S.A. At the same time, Standard & Poor’s assigned its ‘BB+’ rating to proposed mid-to-long-term senior unsecured notes of up to $300 million issued by CFR International SpA, a subsidiary of CFR. The outlook is stable.
The ratings on CFR reflect Standard & Poor’s expectation that the company will report double-digit EBITDA growth over the next two years and its leverage measures will remain in line with a significant risk profile. The ratings also reflect CFR’s “less than adequate” liquidity, the competitive nature of the branded generic drugs industry in Latin America, and the company’s mismatch in currencies between revenues and U.S. dollar-denominated debt on a pro forma basis. In addition, we expect the company to face integration risks due to the company’s recent acquisition of Lafrancol S.A. (not rated; a Colombian pharmaceutical company), which is expected to be closed by the end of the year, despite its good track record in integrating previous acquisitions. Somewhat mitigating these factors are the company’s good market position, its favorable geographic and product diversification, and our expectation that it will generate positive discretionary cash flow by 2013.
CFR is a leading pharmaceutical company in Latin America, with operations in 15 countries across the region, the most important being Chile, Peru, and Colombia. The company also has increased its presence in other emerging and niche markets, including Vietnam, Canada, and the U.K. CFR specializes in the development, production, and commercialization of specialty branded generic drugs. The company’s diversified products include general medicine, women’s health, cardiology, neurology, and psychiatry. CFR also sells complex injectables, dialysis and oncology products for transplants and health and wellness.
Under our base-case scenario, we believe that CFR can achieve double-digit growth over the next two years, even without considering its recent acquisition. This forecast factors in new product launches and the favorable midterm outlook for the Latin American branded generic drug industry. Moreover, our GDP growth assumptions for investment-grade countries in the region are about 5.0% on average for the next two years (compared with our expected 3.0% for Latin America overall in the same period).
We expect EBITDA margins to increase to more than 20% during the next two years, once CFR fully consolidates the recent acquisition. By year-end 2012, and considering the Lafrancol acquisition, debt to EBITDA and funds from operations (FFO) to debt will likely be 4.2x and 20%, respectively, which correspond to a “significant” financial profile. However, during the next two years, without considering significant acquisitions, FFO to debt will likely remain in line with a “significant” financial risk profile (less than 30%), but debt to EBITDA will likely advance to the intermediate financial risk profile range (defined as leverage of 2.0x-3.0x). Moreover, we believe that Lafrancol will contribute positively to CFR, since it also operates in the branded generic drugs industry.
We expect that CFR will continue to consolidate its presence in Latin America through both organic growth and smaller acquisitions, especially in investment-grade countries. In addition, we believe that the company’s management expertise, both operational and financial, will continue to support its strategy.
In order to finance the Lafrancol acquisition, CFR issued a local bond of $142 million and is proposing to issue mid-to-long-term senior unsecured notes of up to $300 million through its subsidiary CFR International SpA. CFR and its main operating subsidiaries--Farmaindustria S.A., Laboratorios Recalcine S.A., Laboratorio Synthesis S.A., and Sundelight Corp.--are expected to fully and unconditionally guarantee the proposed notes. Within 60 days of the closing of the Lafrancol acquisition, Lafrancol and Lafrancol Internacional S.A.S. will also be required to provide guarantees for the notes. Therefore, most of CFR’s debt (including the proposed notes) will be pari passu.
The key factors we consider in our assessment of CFR’s “significant” financial risk profile include the company’s leverage levels of more than 3.0x and the negative discretionary cash flow generation in 2012 due to the Lafrancol acquisition. However, we expect that the company will generate positive discretionary cash flow by 2013--in line with its financial policy. We also expect that adjusted debt to EBITDA, FFO to debt, and EBITDA interest coverage ratios will be 3.1x, 26.4%, and 6.4x, respectively, on average for the next two years.
With the proposed up to $300 million senior unsecured notes, we believe that there is a currency mismatch, since about 60% of the company’s debt will be U.S. dollar denominated, while almost 100% of its revenues will be in other currencies. Moreover, about 22% of CFR’s costs are U.S. dollar denominated. However, we believe this risk is partially mitigated by the long-term nature of the company’s debt.
CFR’s leadership position in the prescription markets in Chile and Peru, and its recent acquisition of Lafrancol, which is a leading pharmaceutical company in Colombia in terms of sales, highlight the company’s “satisfactory” business risk, in our view. The majority of the company’s EBITDA is generated in those countries pro forma. We believe that this partially mitigates the country risk of some of the other countries in which CFR operates in (such as Argentina, Venezuela, and Ecuador). The Latin American pharmaceutical industry in the CFR’s main markets in Latin America has increased at a double-digit rate from 2007 to 2011, compared with a single-digit growth of the global pharmaceutical industry. Therefore, we believe that the company has significant growth opportunities, especially considering that it focuses in less competitive markets.
We view CFR’s liquidity as “less than adequate” for the next 12 months to 18 months, given the company’s recent acquisition of Lafrancol for about $560 million. Our liquidity assessment is based on the following factors and assumptions:
-- The company’s sources (including cash and FFO) over the next 12 months to 18 months will exceed uses by less than 1.2x;
-- The company has flexibility to reduce capital expenditures if needed;
-- The company has good relationships with banks, a prudent financial risk management, and recent access to capital markets;
-- For the next 12 months, the liquidity sources will include cash position of $255.7 million (as of Sept. 30, 2012), FFO of $131.3 million, the local bond issued during fourth-quarter 2012 totaling $142 million, and the proposed unsecured notes of up to $300 million. For the next 12 months, uses will correspond to about $827 million, including debt maturities, working capital outflows, capital expenditures, the acquisition of Lafrancol, and cash dividends; and
-- The company will be in compliance with its financial covenants of maximum net debt to equity of 1.4x and minimum EBITDA interest coverage of 3.0x during the next two years, with a significant EBITDA cushion.
The stable outlook reflects our expectations that CFR will continue to improve its EBITDA margins and its cash flow generation once it consolidates its recent acquisition in Colombia. We believe that the company will maintain its good market position in Latin America and a prudent financial management, with lower leverage once it fully consolidates the recent acquisition. We could downgrade CFR if it undertakes significant debt-financed acquisitions or if its profitability deteriorates if the company is not able to integrate successfully its recent acquisition, resulting in EBITDA margin of less than 15% and adjusted debt to EBITDA of more than 3.0x on a consistent basis.
We could raise the ratings if CFR’s credit measures improve faster than we currently anticipate (resulting in sustained debt to EBITDA and EBITDA margin of less than 2.0x and above 23%, respectively), if the company’s liquidity improves, and if it consolidates its market position in Colombia.
Related Criteria And Research
-- Methodology and Assumptions: Liquidity Descriptors for Global Corporate Issuers, Sept. 28, 2011
-- Criteria Methodology: Business Risk/Financial Risk Matrix Expanded, May 27, 2009
-- Key credit factors: Business and Financial Risks in the Global Pharmaceutical Industry, Jan. 22, 2009
-- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008
New Rating; CreditWatch/Outlook Action
CFR Pharmaceuticals S.A.
Corporate Credit Rating BB+/Stable/--
CFR International SpA
Senior Unsecured BB+