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Rating Action:

Moody's assigns first-time (P)B1 rating to Huvepharma International BV; positive outlook

24 Jul 2014

London, 24 July 2014 -- Moody's Investors Service, (Moody's) has today assigned a provisional (P)B1 corporate family rating (CFR) to Huvepharma International BV (Huvepharma), a parent company of Huvepharma AD, a vertically integrated developer, manufacturer and distributor of a wide range of animal health products to livestock animals with a concentration in poultry and swine. Moody's has also assigned a provisional (P)B1 rating to the proposed EUR75 million senior secured term loan A, EUR180 million senior secured term loan B and EUR20 million senior secured revolving credit facility. The outlook on the ratings is positive. This is the first time Moody's has assigned ratings to Huvepharma.

Moody's issues provisional ratings in advance of the buyback of a 37% share currently held by TRG (unrated), to be fully financed by the proposed term loans. These ratings only represent the rating agency's preliminary opinion and upon a conclusive review of the transaction and associated documentation, Moody's will assign definitive ratings. A final rating may differ from a provisional rating.

RATINGS RATIONALE

The (P)B1 rating primarily reflects Huvepharma's small size, which constraints the company's operating and financial flexibility compared to larger competitors. However, these constraints are partly offset by the company's (1) strong positioning in key niche segments where they proved their ability to successfully compete with a few larger players based on competitive quality and strong reputation among customers; (2) fairly balanced diversification across products, geographies, and customer base; and (3) track record of profitable growth at an annual rate exceeding 20% over the last few years and historical adjusted EBITDA margin of above 20%.

Huvepharma's rating also reflects the solid fundamentals of the animal health market, supported by population growth, improving standards of living, and rising demand for protein products. The healthy new products pipeline, with a high degree of regulatory certainty, will provide the company with additional source of growth.

Moody's views the animal health sector's operating risk profile to be moderate, with much less exposure to litigations and patent expiries and less dependence on pipelines successes than human pharmaceuticals. Key operating risk factors for the segment are macroeconomic pressures that can reduce demand for protein and weather conditions that can affect protein producers, which are well mitigated by the geographic diversification of the company. Furthermore, currently the main concern for the industry comes from the regulatory risks related to the use of antibiotics. Moody's believes that Huvepharma is reasonably well positioned to withstand any potential regulatory pressure given the company's focus on developing products that offset a potential further reduction in antibiotics consumption (antibiotics not used in human health segment, chemical anticoccidials, vaccines, probiotics, enzymes).

The (P)B1 rating also incorporates the proposed buyback of 37% of the company's shares currently held by the financial investor, TRG. As a result of the transaction, 100% of the company will be ultimately controlled by the Domuschiev’s family, long-term strategic investors who have owned the company since 2000. The main shareholders' historical conservative financial policy towards the company, as well as restrictions on shareholder distributions and other cash outflows under the facilities agreement should mitigate potential risks related to the concentrated ownership structure.

At the same time the rating is constrained by a substantial step up in leverage following the buyout transaction with adjusted debt/EBITDA increasing to around 4.6x (4.4x on a net debt basis) from historical levels of below 1.5x (in 2012-13), albeit Moody's expects that this will gradually decrease to below 4.0x by year-end 2015 on the back of strong profitable growth, healthy cash flow generation and Huvepharma's track record of conservative financial policy. The increase in leverage will also be supported by the company's sound liquidity profile, supported by positive free cash flow generation.

STRUCTURAL CONSIDERATIONS

Upon the completion of the buyback transaction, the company's debt capital will mainly comprise an amortising EUR75 million senior secured Term Loan A maturing in 2019, EUR180 million senior secured Term Loan B due in 2020 and EUR20 million senior secured revolving credit facility due in 2019. Moody's rates term loans A and B and the revolving credit facility at (P)B1, the same level as CFR. Both term loans and the revolver will be ultimately guaranteed by all the material subsidiaries (generating above 5% of consolidated EBITDA or assets) and secured by a pledge of assets and shares of Huvepharma and its subsidiaries.

RATIONALE FOR POSITIVE OUTLOOK

The positive outlook on the ratings reflects the potential for the upgrade of Huvepharma's ratings by early 2016 based on Moody's expectation that the company will continue to deliver on its growth strategy as planned while maintaining robust operating performance and a solid liquidity profile which should allow the company to quickly deleverage, with adjusted debt/EBITDA reducing to below 4.0x at year-end 2015. The prospects of an upgrade will also however remain constrained by potential impact on operating performance from potential regulatory changes.

WHAT COULD CHANGE THE RATING UP/DOWN

Moody's would consider upgrading Huvepharma's rating if the company were to (1) continue demonstrating robust operational performance; (2) with a clear trajectory for leverage (measured as adjusted debt/EBITDA) towards below 4.0x while sustaining retained cash flow to net debt at above 15%; and (3) maintain a solid liquidity profile and positive free cash flow generation.

Conversely, Moody's would consider downgrading the ratings, though currently unlikely, in the event of a material deterioration in Huvepharma competitive position within its core product lines, negative impact on operating performance from the increasing regulatory risks or other related developments, which may delay the company's deleveraging process with adjusted debt/EBITDA remaining around 5x and retained cash flow to net debt below 12% on a sustained basis.

PRINCIPAL METHODOLOGIES

The principal methodology used in this rating was the Global Manufacturing Industry published in December 2010. Other methodologies used include Loss Given Default for Speculative-Grade Non-Financial Companies in the U.S., Canada and EMEA published in June 2009. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.

Headquartered in Sofia, Bulgaria, Huvepharma AD is a vertically integrated developer, manufacturer and distributor of a wide range of animal health products to livestock animals, with a focus on poultry and swine markets. Huvepharma sells over 95 products in more than 95 countries, with Europe and North America being its key markets. In 2013, the company generated around EUR200 million of revenues.

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 rating action on the support provider and in relation to each particular 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 rating action, and whose ratings may change as a result of this 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.

Ekaterina Lipatova
Analyst
Corporate Finance Group
Moody's Investors Service Limited, Russian Branch
7th floor, Four Winds Plaza
21 1st Tverskaya-Yamskaya St.
Moscow 125047
Russia

Jean-Michel Carayon
Senior Vice President
Corporate Finance Group
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Moody's assigns first-time (P)B1 rating to Huvepharma International BV; positive outlook
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