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Rating Action:

Moody's changes outlook to stable on Rottapharm's B1 CFR; CFR confirmed

Global Credit Research - 18 Jul 2014

IPO postponed owing to market uncertainty

London, 18 July 2014 -- Moody's Investors Service has today confirmed the B1 corporate family rating (CFR) and B1-PD probability of default rating (PDR) of Rottapharm SpA. Concurrently, Moody's has also confirmed the Ba3 rating on the unsecured notes issued by Rottapharm's wholly owned subsidiary Rottapharm Ltd. The outlook on the ratings is stable. The confirmation of the ratings concludes the review which was initiated on May 21.

RATINGS RATIONALE

The confirmation of the existing ratings follows the company's decision not to execute its IPO plans because of challenging equity market conditions. "The review for upgrade was predicated on a successful completion of an initial public offering which would have led to a material de-leveraging of the capital structure," says Knut Slatten, a Moody's Assistant Vice President and Lead Analyst for Rottapharm. "The change in outlook to stable from negative prior to the review reflects our expectations of an ongoing improving operating environment in Rottapharm's key markets," adds Mr Slatten.

On 10 July, Rottapharm announced it had pulled its IPO plans in view of unfavourable Italian and international market conditions. The transaction would have led to a reduction in net debt by around EUR258 million from the current level of around EUR520 million. As a consequence, Moody's has today confirmed the company's existing ratings as the rating agency no longer anticipates a material improvement in the capital structure over the next 12-24 months. The rating agency notes favourably, however, that Rottapharm's operating performance has improved since the third quarter of 2013, as illustrated by the company's sales in Italy which saw 12% growth during the first quarter of 2014. Supported by a more favourable operating environment, Moody's would anticipate Rottapharm displaying a positive de-leveraging trend in 2014, supported by growth in its EBITDA leading to an estimated debt/EBITDA ratio of 4.5x per year-end 2014. The stable outlook reflects Moody's assumption that Rottapharm will have a leverage -- defined as adjusted debt/EBITDA -- below 5x by the end of 2014, while at all times maintaining an adequate liquidity profile.

Rottapharm's B1 rating continues to reflect (1) its fairly high leverage; (2) geographical concentration, with high exposure to southern Europe, particularly Italy, which represents around 30% of the company's sales; and (3) the company's overall modest scale, with revenues of around EUR540 million in fiscal year 2013. More positively, however, the rating also factors in (1) an overall defensive business risk profile, which to a large degree shelters the company from typical pharmaceutical-related industry risks, such as patent expiration, pipeline execution and litigation; (2) a solid positioning within its product categories, with limited product concentration overall; and (3) healthy profit margins (EBITDA margin of 26% per FY 2013), which, in combination with the company's asset-light model, leads to expectations of sustainable positive free cash flow (FCF) generation.

Moody's expects that Rottapharm's liquidity will be adequate over the next 12 months. Moody's notes, however, that the company does not have access to any committed revolving credit facilities (the company has in place two uncommitted facilities for an aggregate amount of EUR60 million). As of the end of March 2014, Rottapharm had cash balances of EUR75 million and short-term debt of EUR87 million.

Following the review period, Moody's has decided to continue applying the pharmaceutical methodology to Rottapharm.

WHAT COULD CHANGE THE RATING UP/DOWN

Positive pressure on the rating could be exerted if Rottapharm's liquidity profile improves and the company's leverage -- defined as Moody's-adjusted debt/EBITDA -- moves towards 4.0x. Conversely, negative pressure could develop should leverage move above 5.0x for a sustained period of time and/or the company's liquidity profile deteriorates.

PRINCIPAL METHODOLOGIES

The principal methodology used in these ratings was the Global Pharmaceutical Industry published in December 2012. 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.

Rottapharm SpA is an Italy-based pharmaceutical company represented in more than 85 countries worldwide. For the financial year ending December 2013, it reported total net revenues of EUR536 million and EBITDA (before non-recurring items) of EUR138 million.

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.

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

Eric de Bodard
MD - Corporate Finance
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
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United Kingdom
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moody's changes outlook to stable on Rottapharm's B1 CFR; CFR confirmed
No Related Data.
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