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Rating Action:

Moody's affirms Nidda's B3 CFR following M&A transactions; stable outlook

11 Nov 2019

Milan, November 11, 2019 -- Moody's Investors Service ("Moody's") has today affirmed Nidda BondCo GmbH's ("Nidda" or "the group") B3 corporate family rating and B3-PD probability of default rating (PDR). Concurrently, Moody's has affirmed the B2 ratings on the €735 million 1st lien senior secured notes, the existing €406 million and €235 million 1st lien term loan B, the €759 million and GBP 266 million term loan C, and the €400 million revolving credit facility, all issued by Nidda Healthcare Holding GmbH ("Nidda Healthcare"); and assigned a B2 rating to the add-on term loan E and the tap on the existing senior secured notes, which in total will be €760 million. Moody's has also affirmed the Caa2 rating on the €250 million and the €340 million senior secured 2nd lien notes, both issued by Nidda BondCo GmbH. The outlook is stable.

The rating action follows Nidda's acquisition of a portfolio of products from Takeda Pharmaceutical Company Limited (Baa2 stable) for $660 million, and the acquisition of Walmark, a.s. (unrated) from Mid Europa Partners for an undisclosed consideration. Both acquisitions are funded entirely with new debt amounting to €760 million, including the new term loan E added to the existing term loans, and a tap on the existing senior secured notes.

The acquisitions are expected to add around €70 million to the group's EBITDA in 2020, including synergies, and include leading branded products in the Over-the-Counter ('OTC') business in Russia and Central Europe and branded prescription products in cardiovascular, diabetes and general medicine.

While the acquisitions will increase Nidda's leverage by around 0.3x, they will enhance its product diversification and contribution from branded products.

"The affirmation of the ratings with a stable outlook reflects Nidda's strong underlying earnings improvement, which compensate for the group's highly leveraged capital structure," says Ernesto Bisagno, a Moody's Vice President -- Senior Credit Officer and lead analyst for Nidda. "Despite the debt increase, we expect Nidda's Moody's adjusted leverage to decline towards 7.0x by 2020, absent any further debt-funded acquisitions."

The list of the affected ratings can be found at the end of this press release.

RATINGS RATIONALE

Nidda is adequately positioned in the B3 rating category reflecting (1) its highly leveraged capital structure with 2019 pro-forma Moody's adjusted gross debt to EBITDA of around 7.7x; (2) relatively commoditized nature of its generic portfolio; (3) ongoing price erosion for the industry; (4) exposure to foreign currency fluctuations, which can cause volatility in earnings; (5) relatively small size in the context of the European and global pharmaceutical rated universe; and (6) modest execution risk in implementing the additional cost initiatives and potential for additional M&A activity.

The rating also factors in the group's (1) steady growth rate for the industry driven by higher volumes more than offsetting weak pricing; (2) diversified small molecule generics portfolio and good geographical split across key European generics markets; (3) strong OTC brand portfolio with leading market positions across various therapeutic areas and geographic markets; and (4) improving profitability and positive free cash flow generation.

The group reported growth in profits in September 2019 with a last twelve month underlying EBITDA of €582 million, with an increase of 20% compared to September 2018 and 15% versus December 2018. This was driven by stronger performance of both generics and branded products, on the back of positive volumes and contribution from costs saving initiatives and acquisitions completed in 2018. Pro-forma EBITDA for the 12 months to September 2019, as reported by the company, was €745 million, which takes into account the run rate contribution from past acquisitions and cost savings, as well as some adjustments for exceptional items.

Moody's expects additional earnings improvements in the next 12-18 months driven by a combination of positive volume growth offset by weaker pricing, additional cost improvements, as well as the contribution from the acquired assets. The company's operating cash flow is also expected to grow, driven by stronger earnings and modest working capital needs, offset by higher interest paid and modest restructuring costs. With annual capex forecast at €180 million per year, Moody's anticipates positive free cash flow of about €150 - €200 million each year over 2020-21. However, with the new debt incurred to fund these acquisitions, Moody's expects leverage to remain high at 7.7x in 2019 (pro-forma for the acquisitions), and to decline towards 7.0x in 2020, driven by additional earnings improvement.

Moody's has factored into its analysis of Nidda the following environmental, social and governance (ESG) considerations. Social risk is high for the pharmaceutical industry due to a far-reaching regulatory oversight and related efforts to reduce drug expenditures, which may dampen the industry's long-term growth prospects. Responsible production considerations include product safety risk, which generates continuing litigation exposures for the pharmaceutical industry. In terms of governance, the company is tightly controlled by funds managed by Bain Capital Private Equity (Europe), LLP and Cinven Partners LLP which, as is often the case in highly levered, private equity sponsored deals, has a high tolerance for leverage. However, the high tolerance for leverage is mitigated by positive free cash flow generation.

LIQUIDITY

The company's liquidity after the transaction is expected to remain good, underpinned by: (1) a cash balance of about €256 million; (2) a fully undrawn committed revolving credit facility of €400 million; (3) positive free cash flow generation in the next 12-18 months; and (4) limited near- term debt maturities. The RCF will be subject to a total debt leverage covenant at 8.5x, tested quarterly if more than 35% of the facility is drawn.

STRUCTURAL CONSIDERATIONS

In light of the mixed capital structure including both bank debt and bonds Moody's has applied a recovery rate of 50% for the corporate family. The recovery rate assumption of 50% also reflects the covenant lite package with only a springing covenant on the revolving credit facility.

The B2 ratings of the senior secured first lien term loans, senior secured first lien notes and senior secured first lien RCF reflects the creditors first lien claim over a security package consisting of shares from operating subsidiaries accounting for at least 80% of group EBITDA. However the security package is seen as weak as it consists of a pledge on shares, and not on assets of the operating subsidiaries. A further increase in the share of senior debt could reduce the positive notching versus the CFR.

The Caa2 rating of the senior secured 2nd lien notes reflects the second lien claim over the same security package.

RATIONALE FOR STABLE OUTLOOK

Despite the high leverage, the stable outlook reflects Moody's expectation that credit metrics will improve driven by stronger earnings and positive free cash flow generation.

WHAT COULD CHANGE THE RATING UP/DOWN

The company is adequately positioned in the B3 rating category and positive pressure on the rating would reflect a decline in leverage with adjusted gross debt/EBITDA trending to below 6.5x.

Conversely, negative pressure on the rating could materialize if (1) free cash flow generation turns negative on a sustainable basis with failure to reduce leverage; or (2) if operating performance deteriorates.

LIST OF AFFECTED RATINGS

Assignments:

..Issuer: Nidda Healthcare Holding GMBH

....Senior Secured Bank Credit Facility, Assigned B2 (LGD-3)

....Senior Secured Regular Bond/Debenture, Assigned B2 (LGD-3)

Affirmations:

..Issuer: Nidda BondCo GmbH

....LT Corporate Family Rating, Affirmed B3

....Probability of Default Rating, Affirmed B3-PD

....Backed Senior Secured Regular Bond/Debenture, Affirmed Caa2

....Senior Secured Regular Bond/Debenture, Affirmed Caa2

..Issuer: Nidda Healthcare Holding GMBH

....Senior Secured Bank Credit Facility, Affirmed B2

....Senior Secured Regular Bond/Debenture, Affirmed B2

Outlook Actions:

..Issuer: Nidda BondCo GmbH

....Outlook, Remains Stable

..Issuer: Nidda Healthcare Holding GMBH

....Outlook, Remains Stable

PRINCIPAL METHODOLOGY

The principal methodology used in these ratings was Pharmaceutical Industry published in June 2017. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

COMPANY PROFILE

Stada Arzneimittel AG (Stada), the company acquired by Nidda BondCo GmbH (Nidda), is a Germany-based pharmaceutical company specialised in the production and marketing of small-molecule generics and OTC pharmaceutical products. Nidda owns Stada through a sub-holding company, Nidda Healthcare Holding GmbH (Nidda Healthcare). Nidda is the topco of the restricted group and the issuer of the senior notes. Nidda Healthcare is the issuer of the senior secured notes and the borrower under the senior secured term loans.

In 2018, Stada generated revenue of €2.3 billion and EBITDA of €504 million. The 2018 revenue was split 59%/41% between generics and OTC. Stada's small-molecule generics and OTC products portfolio is well diversified across molecules and therapeutic areas. The business is largely focused on Europe and Russia, with no presence in the US market.

REGULATORY DISCLOSURES

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Ernesto Bisagno, CFA
VP - Senior Credit Officer
Corporate Finance Group
Moody's Italia S.r.l
Corso di Porta Romana 68
Milan 20122
Italy
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Ivan Palacios
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Releasing Office:
Moody's Italia S.r.l
Corso di Porta Romana 68
Milan 20122
Italy
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

No Related Data.
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