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15 Jul 1999
MOODY'S ASSIGNS Ba3 RATING TO SENIOR NOTES OF ICN PHARMACEUTICALS, INC.
Moody's Investors Service assigned a Ba3 rating to ICN Pharmaceuticals, Inc.'s (ICN) proposed $100 million of senior notes, due 2008, which are an add-on to the previously issued $200 million of senior notes, due 2008, rated Ba3. The Ba3 rating of the $275 million of senior notes, due 2005, are confirmed. A Ba2 rating is assigned to the $50 million proposed secured revolving credit facility, maturing 2002. The senior implied rating is Ba3. The rating outlook is stable.
The ratings reflect the significant risk in the company's operations in Russia, Eastern Europe and China which could potentially cause a drain on overall corporate cash flow, dependence on foreign operations (which represented 67% of first quarter 1999 revenues), the ongoing product and business acquisition integration risk, competition from companies with greater capital resources which may spend more on research and development, and dependence on successful product acquisitions and commercialization for future growth. The ratings anticipate that the company will not incur a significant amount of additional bank debt senior to the senior notes.
Positive rating considerations include high gross profit margins, the continuing diversification of its product line and revenues in North America and Western Europe with a strategic focus on high margin products, satisfactory coverage of total interest from the cash flow of North American operations, and management's stated intention to largely self-finance capital expenditures in Eastern Europe including Russia. The ratings also anticipate increases in North American sales, earnings, and cash flow from royalty payments from Schering-Plough related to Rebetron (TM) combination therapy for treatment of chronic hepatitis C, as well as growth from other products.
Proceeds of the $100 million senior notes will be used to repay $42 million of various short-term notes and long-term debt and mortgages which were largely senior to the existing senior notes, and for general corporate purposes. It should be noted that in June 1999 in anticipation of the proposed senior notes the company also repaid $42 million of Hungarian subsidiary indebtedness. The repayment of subsidiary debt is part of a consolidation of cash management processes.
The Ba3 rating of the senior notes reflects the senior position of the notes in the capital structure. The senior notes are effectively subordinated to the proposed $50 million secured credit facility to the extent of the collateral, and structurally subordinated to the indebtedness and other obligations of the subsidiaries which is not a significant amount.
The Ba2 rating of the $50 million secured revolving credit facility reflects the benefits of a good collateral package which should provide sufficient coverage of outstandings in a distress situation. The collateral consists of cash and eligible investments and North American accounts receivable, and is subject to a borrowing base.
The risks associated with the company's operations in Eastern Europe and Russia were demonstrated during 1998 when the company wrote-off all of its investment in Yugoslavia totalling over $400 million, and also experienced about $80 million translation and exchange losses. The net monetary asset position which is subject to possible loss in the event of further declines of the Russian ruble is currently significantly reduced to about $12 million. As part of ICN's strategy of international expansion, the company continues to invest in emerging markets which are subject to uncertain political and economic conditions. However, for rating purposes Moody's continues to focus upon the creditor protection from cash flow of North American operations.
ICN's 1998 revenues totaled $838MM, and adjusted operating income and EBITDA excluding the $451MM related to the Eastern Europe write-off, totaled about $161MM and $212MM respectively. Capital expenditures have in recent years exceeded depreciation and amortization, and totaled $110MM in 1998. North American 1998 operating income totaled $98MM and EBITDA $110MM. ICN has a current market capitalization of about $2.5 billion. Pro forma for the note offering as of 3/31/99 debt represents 48% of book capitalization, 12/31/98 Pro Forma Debt/Adjusted EBITDA is 2.7 times, and Adjusted EBITDA/Pro Forma Interest is 4.1 times. 1998 North American EBITDA/Total Pro Forma Interest is 2.1 times and Pro Forma Debt/ North American EBITDA is 5.2 times. Rising royalty payments from Rebetron (TM) ($37MM received in 1998 and $16MM in the first quarter of 1999) are expected to contribute to higher future North American revenues and cash flow.
The indenture governing the $100 million notes and the existing $200 million notes limits the incurrence of additional debt to a cash flow coverage ratio of 3.0 times, and provides for carve-outs for $50 million of senior bank debt, and up to $35 million for other debt. The indenture also limits restricted payments, liens, merger and consolidation, and asset sales.
ICN Pharmaceuticals, Inc., headquartered in Costa Mesa, California, is a multinational company which develops, manufactures and sells pharmaceutical, research and diagnostic products.
No Related Data.
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