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Rating Action:

Moody's downgrades Catalent's senior secured rating to Ba3, affirms B1 CFR rating; the outlook remains stable

09 May 2019

New York, May 09, 2019 -- Moody's Investors Service ("Moody's") downgraded Catalent Pharma Solutions, Inc. ("Catalent")'s senior secured credit ratings to Ba3 from Ba2. At the same time, Moody's affirmed Catalent's B1 Corporate Family Rating (CFR), the B1-PD Probability of Default Rating, and the B3 senior unsecured rating. Moody's also assigned a Ba3 rating to Catalent's proposed $650 million incremental new term loan under its existing senior secured credit facilities. This follows the proposed acquisition of Paragon Bioservices ("Paragon"), a viral vector development and manufacturing company, for $1.2 billion. The acquisition is expected to close by the end of May 2019.

The downgrade of the senior secured credit facilities reflects the increased preponderance of secured debt in the company's capital structure following the proposed transaction. As a result Moody's expects a higher loss given default for Catalent's secured debt facilities.

The affirmation of Catalent's B1 Corporate Family Rating reflects Moody's expectations that debt/EBITDA will improve over the next 12-18 months. Debt/EBITDA will be approximately 5 times at the closing of the acquisition of Paragon. In addition, Moody's expects the addition of Paragon will strengthen Catalent's Contract Development and Manufacturing Organization ("CDMO") business in the fast-growing gene therapy area.

Ratings downgraded:

Catalent Pharma Solutions, Inc.

Senior secured credit facilities to Ba3 (LGD3) from Ba2 (LGD2)

Ratings assigned:

Senior secured term loan at Ba3 (LGD3)

Ratings affirmed:

Catalent Pharma Solutions, Inc.

Corporate Family Rating at B1

Probability of Default Rating at B1-PD

Senior unsecured notes due 2024 at B3 (LGD5)

Senior unsecured notes due 2026 at B3 (LGD5)

Speculative Grade Liquidity Rating at SGL-1

The outlook is stable.

RATINGS RATIONALE

Catalent's B1 Corporate Family rating reflects its relatively high financial leverage and modest free cash flow. The rating is also constrained by volatility inherent in the pharmaceutical contract manufacturing industry. Lost revenue when customers' drugs become generic, pricing pressure is exerted by large clients, and high fixed costs can create volatility in profit and cash flows. The rating is supported by Moody's expectation that Catalent will benefit over the next 2-3 years as more drugs coming to market require more complex dosage solutions. Catalent will also benefit from its push into more stable, albeit lower margin, businesses such as consumer and animal health. The rating is also supported by Catalent's good scale and leading market position in the development and manufacturing of softgels and other oral drug delivery technologies. The company also maintains a diversified customer base and commands a large library of patents, know-how, and other intellectual property that raise barriers to entry and enhance margins.

The Speculative Grade Liquidity Rating of SGL-1 reflects Moody's expectation that Catalent's liquidity will remain very good over the next 12 to 18 months. Catalent's liquidity will be supported by free cash flow in excess of $150 million over the next year, a strong cash balance ($228 million as of March 31, 2019), and its proposed $550 million revolving credit facility.

The stable outlook reflects Moody's expectation that leverage will improve over the next 12 to 18 months following the Paragon acquisition, however Catalent is likely to remain acquisitive. Moody's also expects strong demand for Catalent's biologics services will be partially offset by near-term headwinds in its softgels.

The ratings could be upgraded if Catalent reduces financial leverage such that its debt to EBITDA approaches 4.0 times. Successful integration of acquisitions and organic growth that results in increased scale and improved business line diversity, including reduced concentration in softgels, would also support an upgrade.

The ratings could be downgraded if Moody's expects Catalent's financial leverage to be sustained above 5.5 times. The ratings could also be downgraded if Catalent's earnings deteriorate or if the company adopts a more aggressive acquisition strategy.

Catalent Pharma Solutions, Inc. is a leading provider of development solutions and advanced delivery technologies for drugs, biologics and consumer health products. These include the company's formulation, development and manufacturing of softgels and other products for the prescription drug and consumer health industries. The company reported revenue of approximately $2.5 billion for the twelve months ended March 31, 2019.

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 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.

Jean-Yves Coupin
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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