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Rating Action:

Moody's assigns B3 CFR rating to Cambrex Corporation; outlook stable

04 Nov 2019

New York, November 04, 2019 -- Moody's Investors Service ("Moody's") assigned ratings to Cambrex Corporation ("Cambrex"), including a B3 Corporate Family Rating and B3-PD Probability of Default Rating. Moody's also assigned a B2 rating to the $875 million 1st lien secured term loan and $135 million secured revolver and a Caa2 rating to the $250 million 2nd lien secured term loan. The outlook is stable.

Cambrex is being acquired in a leveraged buyout transaction by an affiliate of Permira funds for $2.4 billion. Proceeds from the debt raise will be used, in connection with equity from the sponsor, to fund the acquisition, repay existing debt as well as pay fees and expenses.

Ratings assigned:

Cambrex Corporation

Corporate Family Rating at B3

Probability of Default Rating at B3-PD

First lien secured credit facilities at B2 (LGD3)

Second lien secured term loan at Caa2 (LGD5)

Outlook action:

The outlook is stable.

RATINGS RATIONALE

The B3 Corporate Family Rating reflects Cambrex's high financial leverage, with pro forma adjusted debt to EBITDA approximating 7.0x pro forma (including anticipated cost savings). Deleveraging will be slow, as revenue and earnings will be pressured in 2020. This is because sales and earnings from its largest customer, Gilead Sciences, Inc., will continue to significantly decline through 2020 as Gilead's own sales of Hepatitis C drugs decline. Cambrex has identified cost savings that, if achieved, will partially mitigate this headwind. Moody's forecasts deleveraging in 2021, but this is somewhat reliant on customers' new product launches, which are subject to FDA approval. Further, it is solely focused on producing and developing small molecules. Moody's believes that, over time, the company will seek to enter into the large molecule market, potentially through acquisition.

The rating is supported by Cambrex's capabilities as a fully integrated CDMO for small molecules. There are significant switching costs to other suppliers for customers, which adds some durability to supplier relationships. Through recent acquisitions, Cambrex has diversified beyond active pharmaceutical ingredient (API) manufacturing and into small molecule finished dosage manufacturing and early stage development services. Moody's believes that these two newer businesses (together representing around 30% of revenue) have good revenue growth potential, albeit at lower margins than the API business. Further, Moody's believes that there will be solid opportunities for additional cross selling of services with its recently diversified platform. Cambrex has a long track record of regulatory compliance, long-term customer relationships and high quality manufacturing capabilities.

Cambrex has moderate environmental, social and governance risk. These risks mostly to pertain to quality production and waste management related to its production sites. Many of Cambrex's competitors producing API or finished pharmaceutical dosage forms have experienced significant challenges related to regulatory inspections and product recalls. Challenges in the industry have thus far been a competitive advantage for Cambrex which maintains a favorable track record of production quality and regulatory compliance.

Cambrex's liquidity is good, primarily driven by access to a $135 million revolver that will expire in 2024 as well as Moody's expectations for good free cash flow in 2021. Moody's expects around $20 million of cash once the LBO transaction closes at the end of 2019. Free cash flow in 2020 will be burdened by a one-time payment to Gilead of $39 million that Moody's believes will occur mid-year as well as other one-time cash costs to achieve cost savings. Depending on timing of these costs, Cambrex may need to temporarily draw on its revolver. Moody's expects that it would be repaid with cash flow over time. Working capital will be a benefit in 2020 as Cambrex winds down the remaining inventory related to Gilead's sofosbuvir API. The revolver will have a springing maximum 1st lien net leverage financial covenant that is tested once borrowings exceed 35%. Moody's does not expect the company to test the covenant based on modest borrowing expectations.

The stable outlook reflects Moody's view that Cambrex will begin to see increasing benefit from cross-selling as a new fully-integrated CDMO with low single digit revenue growth over the next 12-18 months. The outlook also reflects Moody's expectations of debt/EBITDA remaining high at around 7x before declining in 2021.

The ratings could be downgraded if liquidity deteriorates or if debt/EBITDA increases above 7.5x. Material operating challenges, such as FDA warning letters, could also result in a downgrade. The ratings could be upgraded if Cambrex can sustain debt/EBITDA around 6.0x, while generating good free cash flow. Acceleration of revenue growth which demonstrates the strategic benefits of being a fully integrated CDMO would also support an upgrade.

Cambrex Corporation is a contract development and manufacturing organization, with a focus primarily in small molecules. Most of its revenue is generated from developing and manufacturing active pharmaceutical ingredients used in clinical-stage, and commercial stage drugs (both branded and generic). Cambrex also provides finished dosage form contract manufacturing, and early stage development services. Cambrex will be owned by private equity sponsor Permira Funds. Reported revenues for the twelve months ended September 30, 2019 were approximately $616 million.

The principal methodology used in these ratings was Business and Consumer Service Industry published in October 2016. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

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.

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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.

Morris Borenstein
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Jessica Gladstone, CFA
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

No Related Data.
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