September 7, 2017 / 1:44 PM / a year ago

Fitch Rate Nidda BondCo 'B+(EXP)'; Senior Debt 'BB-(EXP)'

(The following statement was released by the rating agency) LONDON, September 07 (Fitch) Fitch Ratings has assigned Nidda Bondco GmbH an expected Issuer Default Rating (IDR) of 'B+(EXP)'. The Outlook is Stable. Fitch also has assigned expected senior secured instrument ratings to debt issued by Nidda Healthcare Holding AG at 'BB-(EXP)'/'RR3'/68% and by Nidda BondCo GmbH at 'B-(EXP)'/'RR6'/0%. A full list of rating actions is attached below. Nidda BondCo GmbH is the entity owning Nidda Healthcare Holding AG, the company expected to take control of Stada Arzneimittel AG (Stada). Nidda BondCo GmbH is therefore the top-co entity of a restricted group post acquisition and hence the entity to which Fitch has assigned the IDR. The 'B+(EXP)' reflects a solid 'BB' category business risk profile by way of Stada's scale, broad product portfolio and pan-European footprint, against a post-buyout weak 'B' rating category financial leverage. We believe Stada's intrinsically strong earnings, cash flows and margins, will allow the company to gradually de-risk its leveraged balance sheet and align its leverage with the 'B+(EXP)' rating. The assignment of the final ratings is contingent on the successful launch of the proposed combination of loan and bond transactions materially conforming to our assumptions around amounts, tenors and terms, as well as the successful implementation of a domination and profit and loss transfer agreement between the acquiring private equity vehicle and the listed company. KEY RATING DRIVERS Business Risk Supports Ratings: The ratings are underpinned by strong product and geographic diversification, which allows Stada to benefit from structural growth in the generics and consumer health markets and results in low product, customer and supplier concentration and limited correlation among end-markets. Stada's consumer business is also supported by strong regional/national brands. High Leverage, Rating Constraint: Fitch views Stada's financial leverage as aggressive and a rating constraint, with an estimated funds from operations (FFO) adjusted net leverage of around 7.5x post-buyout, before gradually declining towards 6.0x over a four-year rating horizon. We view such financial leverage as commensurate with the weaker end of the 'B' rating category and only over time will the anticipated deleveraging bring leverage more in line with the assigned rating. Satisfactory Cash Flows, Deleveraging Ability: Stada benefits from healthy cash generation and conversion and we estimate free cash flow (FCF) margins of 6.5%-9% over the rating horizon, which supports the rating. FFO fixed charge coverage should remain at around 2.5x over the rating horizon, also consistent with a 'B+' rating in the pharmaceutical sector. Appropriate Management & Corporate Governance: Fitch expects that the private equity sponsors will implement corporate governance structures appropriate for such a large take-private transaction, including an executive management team with adequate experience in the pharmaceutical industry. We view the installation of permanent supervisory and management boards as instrumental for Stada, which has suffered from recent management changes, in delivering an ambitious business plan. Positive Market Fundamentals: Fitch views positive fundamentals for the European generics market to continue as governments and healthcare providers seek to optimise healthcare cost structures, which are under pressure from growing and ageing populations, increasing prevalence of chronic diseases as well as expensive new innovative treatments coming to market and affecting budgets. Given limited overall generic penetration in Europe versus the US, we see continued structural growth opportunities, also in view of increasing introduction of biosimilars. European Consolidation: Europe continues to have a much more fragmented landscape of generic players, characterised by a small to mid-sized sector often with a national focus offering further consolidation opportunities ( involving private equity investors), Good Recovery Expectations for Senior Secured: Holders of senior secured debt and Term Loan B are expected to receive good recoveries as expressed in an instrument rating of 'BB-(EXP)'/'RR3'/68%. Senior unsecured note investors ranking second in an enforcement scenario would recover 0% as captured in a senior unsecured instrument rating of 'B-(EXP)'/'RR6'/0%. Going Concern Approach: In Fitch's recovery analysis, preference has been given to the going concern approach over balance sheet liquidation. This reflects Stada's asset-light business model with an established brand supporting higher realisable values in a distress scenario. In its going concern analysis enterprise value (EV) calculation Fitch has applied a 25% discount to the LTM EBITDA as of June 2017 of EUR408 million leading to a post-distress EBITDA of EUR304 million, as post-distress cash flow proxy. One-Notch Uplift for First Lien: We have applied a 7.0x distressed EV/EBITDA, using Stada's own through-the-cycle trading multiples as well as broader sector trading benchmarks. After deducting10% for administrative claims, first lien debt holders would be able to recover 68% of the debt face value, leading to a one-notch uplift from the IDR of 'BB-'. Consequently, second lien senior unsecured note holders would recover nil of the debt face value, leading to the instrument rating being two notches below the IDR. DERIVATION SUMMARY Fitch rates Stada according to its global rating navigator framework for pharmaceutical companies. Under this framework, Stada's generic and consumer business benefits from satisfactory diversification in products and geographies, with exposure to mature, developed and emerging markets. Compared with more global players in the industry such as Teva Pharmaceutical Industries Ltd. (BBB-/Negative), Mylan N.V. (BBB-/Stable) and diversified players such as Novartis AG (AA/Stable) and Pfizer Inc. (A+/Negative), the business risk profile is impacted by Stada's European focus. High financial leverage is key rating constraint, compared with international peers, and is reflected in the 'B+ rating'. KEY ASSUMPTIONS Fitch's key assumptions within our rating case for the issuer include: - Sales growth of 2%-3%; -EBITDA margins improving from 19% in 2017 towards 23% in 2020, driven by realisation of most cost savings envisaged by the financial sponsors; -Capex at 3% of sales; -Bolt-on acquisitions of EUR100 million per annum from 2018; -Minority dividends at 25% of net profits for 2017; -Full control of Stada by the sponsors in 2018, and additional equity premium that may be paid to complete the acquisition process to be primarily funded by equity, with only limited additional debt contribution. RATING SENSITIVITIES A positive rating action is not envisaged given the significant financial risk post-acquisition constraining the IDR at 'B+'. Over time a positive ration action could be considered on a more transformational capital structure with an equity injection by way of an IPO or strategic acquisition leading to: -Sustained strong EBITDA profitability (EBITDA margins trending in excess of 25%) and FCF margin consistently more than 5%; -Reduction in FFO adjusted net leverage towards 4.5x; -Improvement in FFO fixed charge cover to more than 3.0x. Further developments that may, individually or collectively, lead to negative rating action: -Inability to grow the business and realise cost savings, resulting in pressure on profitability and FCF margins weakening to low single digits; -Failure to de-leverage towards 6.0x FFO adjusted net leverage; -FFO fixed charge cover tightening towards 2.0x. LIQUIDITY Comfortable Liquidity: For 2017, the year-end cash balance will be strongly impacted by the economics and timing of the minority share acquisition, and therefore not representative of the underlying cash generative quality of Stada. Following the buyout completion in 2018, Fitch projects strong year-end cash reserves of around EUR200 million during 2018-2020. We have excluded from the liquidity analysis EUR102 million consisting of EUR100 million as a minimum required for operational needs and EUR2.3 million of cash reserves held in China, both of which cannot be used for debt service. Its revolving credit facility of EUR400 million is forecast to remain undrawn. FULL LIST OF RATING ACTIONS Nidda BondCo GmbH IDR assigned at 'B+(EXP); Stable Outlook Senior unsecured debt assigned at 'B-(EXP)/RR6/0%' Nidda Healthcare Holding AG Senior secured debt assigned at 'BB-(EXP)/RR3/68%' Contact: Principal Analyst Elena Stock Director +49 69 768 076 135 Supervisory Analyst Frank Orthbandt Director +44 20 3530 1037 Fitch Ratings Limited 30 North Colonnade London E14 5GN Committee Chairperson Edward Eyerman Managing Director +44 20 3530 1359 Media Relations: Adrian Simpson, London, Tel: +44 203 530 1010, Email: Summary of Financial Statement Adjustments: - Fitch capitalises finance lease obligations using an 8.0x multiple; - Receivables factoring of EUR6 million added back to financial debt and trade receivables in accordance with Fitch's treatment of receivables securitisation; -Restricted cash of EUR102.3 million comprises EUR100 million of minimum cash required for daily operations as estimated by Fitch and a further EUR2.3 million of restricted cash held in China; - Fitch-defined EBITDA is adjusted for one-off items such as cost in relation to non-recurring contract termination, redundancy payments or acquisition-related expenses, which are shown below FFO as non-operating/non-recurring cash flow items. Additional information is available on For regulatory purposes in various jurisdictions, the supervisory analyst named above is deemed to be the primary analyst for this issuer; the principal analyst is deemed to be the secondary. Applicable Criteria Corporate Rating Criteria (pub. 07 Aug 2017) here Country-Specific Treatment of Recovery Ratings (pub. 18 Oct 2016) here Non-Financial Corporates Notching and Recovery Ratings Criteria (pub. 16 Jun 2017) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here Solicitation Status here Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. 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