Fitch Places RPI Finance Trust's Ratings on Negative Watch
CHICAGO -- May 16, 2013
Fitch Ratings has placed the ratings of RPI Finance Trust (RPI FT), including
the 'BBB-' Issuer Default Rating (IDR), on Rating Watch Negative. The rating
action follows RPI FT's intention to acquire Elan Corp. plc (Elan). The rating
action applies to approximately $3.5 billion of debt outstanding on Dec. 31,
2012. A full list of ratings placed on Negative Watch is listed below.
Fitch placed RPI FT's IDR on Negative Watch given incremental debt required
for the potential acquisition of Elan which would pressure the credit profile
and possibly lead to a downgrade of the ratings. RPI FT's interest in Elan
lies primarily in the royalty-bearing interest in the multiple-sclerosis
medicine Tysabri. RPI FT initiated the acquisition process under Irish
takeover rules on May 2, when the company made a formal offer of $11.25 per
share to Elan shareholders. The process runs 60 days and may involve revisions
to the current offer price. The outcome to RPI FT's credit profile is
uncertain and could be influenced over the next two months by:
--The offer price, which could increase to garner more shareholder interest.
--The incremental debt needed to complete the transaction. Fitch expects cash
on hand and equity proceeds to partially fund the acquisition; however,
leverage may approximate 5.0x on a pro forma basis with additional debt upon
closing of the acquisition.
--Plans for debt reduction over the next 18 months following the transaction,
--The outcome of the potential transaction between Elan and Theravance Inc.
(Theravance) in which Elan would buy royalty-bearing interests in a portfolio
of Theravance's respiratory treatments. The transaction would cost $1 billion,
essentially erasing one-half of Elan's present cash balance, with an
expectation to close by the end of June.
--Any changes to the terms of the bank credit facilities that could
potentially accelerate debt repayment through the excess cash flow recapture
KEY RATING DRIVERS
Average Life of Royalty Portfolio to Increase:
RPI FT shares a portfolio of 38 royalty-bearing interests with RP Select
Finance Trust due to an investment event that occurred in August 2011. In
2012, RPI FT acquired around $900 million of new assets including the purchase
of an interest in an earn-out pertaining to the recently launched multiple
sclerosis medicine, Biogen's Tecfidera (BG-12). Given the new assets, the
weighted average useful life of the portfolio is estimated at 7.0 years. The
addition of the Tysabri royalty, which does not expire, would push useful life
to beyond 13 years. Fitch expects RPI FT to maintain a weighted average useful
life of the diversified asset portfolio commensurate with the leverage and
debt maturity schedule.
EBITDA Generation and FCF Remain Strong:
RPI FT's low operating expense base results in exceptional EBITDA generation,
which was approximately $1.1 billion in 2012 representing a margin of greater
than 99%. Fitch anticipates operating costs to remain low, yielding sustained
high EBITDA margins through the ratings horizon. Fitch believes that RPI FT
will maintain free cash flow margins above 30% over the ratings horizon
despite generous distributions to equity holders of around 45% of EBITDA. RPI
FT had cash and cash equivalents of $1.1 billion at the end of 2012. Debt
maturities are highly manageable over the intermediate term and are isolated
to 1% amortization of secured term loan B facilities.
Positive rating action is unlikely for RPI FT as any reduction in leverage
signals future acquisition activity.
A downgrade would result from RPI FT's inability to rapidly reduce high
leverage to below 3.5x following the leveraging acquisition of Elan, if the
company is successful in its takeover effort. In addition, an intention to
completely wind down the royalty-bearing assets would pressure the rating. A
fall in the average weighted useful life of the royalty asset portfolio such
that it is no longer commensurate with the debt maturity schedule will also
pressure the rating.
Fitch has placed the following ratings of RPI FT on Rating Watch Negative:
--Issuer Default Rating (IDR) at 'BBB-';
--Senior secured bank loan rating at 'BBB-'.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
'Corporate Rating Methodology' Aug. 8, 2012
Applicable Criteria and Related Research
Corporate Rating Methodology
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Michael Zbinovec, +1-312-368-3164
Fitch Ratings, Inc.
70 West Madison Street
Chicago, IL 60602
Megan Neuburger, +1-212-908-0501
Bill Densmore, +1-312-368-3125
Brian Bertsch, +1-212-908-0549
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