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Rating Action:

Moody's assigns first-time B1 CFR to Ceva Santé Animale; negative outlook

21 Nov 2016

Assigns B1 senior secured rating to existing EUR668 million and proposed EUR600 million term loan facilities

London, 21 November 2016 -- Moody's Investors Service has today assigned a first-time B1 corporate family rating (CFR) and B1-PD probability of default rating (PDR) to global veterinary health company Financière Top Mendel SAS ("Ceva" or "the issuer"). The outlook on the ratings is negative.

"The B1 rating of Ceva acknowledges the company's established track record of profitable growth, favourable industry-dynamics and strong liquidity profile" says Knut Slatten, a Moody's analyst and lead analyst for Ceva. "The negative outlooks reflects essentially the company's highly leveraged capital structure where leverage is expected to remain stretched for the rating category over the next 24 months," adds Mr Slatten.

Concurrently, Moody's has assigned a B1 rating with a loss given default assessment of LGD4 to the issuer's existing EUR668 million term loan facility and proposed EUR600 million add-on tranche issued at Financière Mendel SAS and Ceva Sante Animale SAS, wholly owned by Financière Top Mendel, and due in 2021. Moody's has also assigned B1 ratings to the company's EUR50 million revolving credit facility (RCF) and the EUR100 million capex/acquisition facility (both due 2020). The outlook on the ratings is negative.

The proceeds of the incremental term loan issuance will be used to (1) acquire a portfolio of assets from a competitor, (2) acquire two local players in Brazil, (3) partially repay its outstanding payment in kind (PIK) loans issued at a holding company level outside of the restricted group, and (4) pay fees and expenses incurred in connection with the proposed transactions.

RATINGS RATIONALE

The B1 CFR assigned to Ceva reflects (1) an established track record of profitable growth and de-leveraging in the past; (2) very favourable industry-dynamics -- notably in emerging markets -- allowing Ceva to continue on its trajectory of future growth; (3) a solid competitive positioning in certain niche segments; (4) a strong liquidity profile; and (5) a limited degree of concentration both in terms of products as well as clients with the company's top 10 products representing around 29% of revenues.

The rating is nevertheless constrained by (1) a highly leveraged capital structure with estimated leverage -- defined as Moody's adjusted (gross) debt/EBITDA -- likely to remain above 5.5x over the next 18 months; (2) its overall modest size in a consolidating industry where the largest players benefit from greater economies of scale; and (3) a certain degree of event risk because of its acquisitive nature.

LIQUIDITY

Ceva's good liquidity profile is underpinned by a cash balance expected to reach c. EUR200 million at closing of the transaction. Further liquidity cushion is provided by access to the EUR50 million revolving credit facility and EUR100 million capex/acquisition facilities -- both of which undrawn at closing. Given the high cash balance of the company, the RCF is expected to remain undrawn in the foreseeable future.

STRUCTURAL CONSIDERATIONS

The B1 ratings -- in line with the CFR -- assigned to the loan facilities reflect their positioning in the waterfall as governed by an intercreditor-agreement. Moody's notes the term loans, RCF and capex/acquisition facilities are bound by loss-sharing provisions which remove structural subordination in the structure. The loan facilities will not benefit from upstream guarantees from the operating entities and Moody's notes the security package essentially consists of share pledges.

Ceva's RCF contains one maintenance covenant, which is only to be tested if the RCF is drawn at 30% or more and Moody's notes that an eventual non-compliance with the covenant would not trigger immediately an event of default for the term loans. In light of the covenant-lite structure, Moody's has decided to apply a 50% recovery rate.

RATIONALE FOR THE NEGATIVE OUTLOOK

The negative outlook reflects the company's high leverage with a Moody's adjusted gross debt/EBITDA expected to remain above 5.5x for an extended period of time after closing of the transaction. Ceva is expected to remain at the upper-end of the triggers set for its rating-category for at least 18 months, leaving limited room for deviations in operating performance. Moreover, the negative outlook does not leave room for large debt financed acquisitions and Moody's would expect Ceva to deleverage from an expected high point at closing of the transaction.

The rating agency's tolerance for a higher leverage post acquisition for at least 18 months is supported by Ceva's solid operational track record and positive dynamics in the industry as well as a substantially lower net leverage underpinned by the company's solid cash balances.

WHAT COULD CHANGE THE RATING UP/DOWN

Moody's could consider stabilizing the rating should Ceva continue to demonstrate a track record of solid profitable organic growth allowing for its leverage ratio to move towards 5.5x. Positive pressure on the rating could develop should Ceva succeed in deleveraging such that its debt/EBITDA ratio declines materially below 5.0x and there is evidence of a strong commitment to maintain leverage at this lower level on a sustainable basis together with continued robust positive free cash flow generation.

Conversely, negative pressure could develop if the company's Moody's adjusted gross leverage stays above 5.5x on a sustainable basis or if the company embarks upon a large debt financed acquisition. A weakening in the company's liquidity profile could also exert downward pressure on the ratings.

PRINCIPAL METHODOLOGY

The principal methodology used in these ratings was "Global Manufacturing Companies" published in July 2014. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

Ceva is an independent player in the animal health industry focusing on research, development, production and marketing of pharmaceutical products and vaccines for companion animal, poultry, ruminant and swine. Headquartered in France, the company has offices in 44 countries, operates in more than 110 countries and employs more than 4,000 employees worldwide. Ceva is majority-owned by management whilst a consortium of sector-investors (bioMerieux, Sofiproteol) and private equity firms (Euromezzanine, Sagard, CDH Investments, and Temasek) have a minority-stake in the company. In 2015, Ceva recorded revenues of EUR856 million and reported EBITDA of EUR150 million. Ceva claims the third position in the global poultry vaccines market and intends to become the leader by 2020.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt 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.

Knut Slatten
Vice President - Senior Analyst
Corporate Finance Group
Moody's France SAS
96 Boulevard Haussmann
Paris 75008
France
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Yasmina Serghini
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Releasing Office:
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

No Related Data.
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