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Rating Action:

Moody's rates Ikaria's LBO debt and assigns B2 CFR; outlook stable

23 Jan 2014

Approximately $1.3 billion of new debt instruments rated

New York, January 23, 2014 -- Moody's Investors Service assigned a B2 Corporate Family Rating and a B2-PD Probability of Default Rating to Ikaria, Inc. ("Ikaria"). Concurrently, Moody's rated Ikaria's proposed 1st lien senior secured credit facilities at B1 and 2nd lien senior secured term loan at Caa1. The outlook is stable.

Proceeds from the proposed debt issuance of approximately $1.245 billion, combined with $224 million of new cash equity contribution and $188 million of rollover equity from existing shareholders and management, will be used to fund the acquisition of Ikaria by Madison Dearborn Partners, LLC (MDP), to repay existing debt at Ikaria's subsidiary (Ikaria Acquisition Inc), and to pay fees and expenses.

As part of the transaction, Ikaria is finalizing its previously announced plans to split its operations into the Commercial Business and the R&D Business. MDP and management are only acquiring the Commercial Business, while the R&D Business will remain with existing shareholders. Upon consummation of the transaction, MDP will indirectly own roughly 52% of equity interest in Ikaria and existing shareholders and management will own the remaining 48%.

The rating action is as follows:

Ratings assigned subject to Moody's review of final terms and documents:

Ikaria, Inc.

Corporate Family Rating -- B2

Probability of Default Rating -- B2-PD

1st lien senior secured credit facilities -- B1 (LGD3, 32%)

2nd lien senior secured term loan -- Caa1 (LGD5, 86%)

All the ratings of Ikaria Acquisition Inc. will be withdrawn upon closing of the transaction.

RATING RATIONALE

The B2 CFR incorporates Ikaria's small size and single product concentration risk, with almost all its revenues derived from INOMAX therapy. The B2 CFR also reflects Ikaria's considerable financial leverage as well as its history of aggressive dividends albeit under the existing ownership. However, the initially high leverage upon closing (which Moody's estimates around 5.5x debt/EBITDA) is somewhat balanced by the company's solid free cash flow generation and Moody's forward view of steady deleveraging. Moody's anticipates that Ikaria's debt/EBITDA will fall below 5.0x over the next 12-18 months, driven by debt repayment and EBITDA growth. The ratings are also constrained by the high level of off-label use of its products (the company cannot legally market for off-label indications).

Positive rating consideration is given to Ikaria's strong competitive position within its niche market, treating critically ill patients who often have few treatment alternatives. Although certain key patents for INOMAX expired or will expire in 2013 and 2014, the company has attained other longer-dated patents expiring in 2029 and 2031. While medium and longer term competitive pressures will persist, Moody's believes there are relatively high barriers to entry. Therefore the company will be subject to only modest pricing declines and/or market share loss over the next 2 to 3 years if competition were to occur.

The stable rating outlook is predicated on steady growth of revenues and EBITDA, continuous deleveraging and the maintenance of good liquidity. Further, the stable outlook incorporates Moody's expectation that there will be no business disruption due to R&D Business separation, product recalls or other product issues. In addition, the outlook assumes that the recent unfavorable clinical trial studies for BPD and Terlipressin will not result in a material adverse financial impact.

Moody's could downgrade the ratings if any event is expected to materially disrupt revenue or cash flow of INOMAX, such that there would be material weakening of liquidity or if leverage exceeds 5.5 times. Moody's could also downgrade the ratings if competitive pressures are expected to erode market share or pricing.

Positive rating pressure could develop if Ikaria establishes a track record of maintaining a more conservative financial policy. Absent meaningful competitive entrants, the ratings could be upgraded if Ikaria is able to grow revenue and earnings consistently and if leverage is sustained below 3.0x times.

Ikaria, headquartered in Hampton, New Jersey, develops and manufactures products aimed at the critical care market. The company's current product, INOMAX® therapy, delivers nitric oxide (NO), a pharmaceutical drug delivered in gas form, for inhalation through a proprietary delivery system. For the twelve months ended September 30, 2013, Ikaria generated revenues of approximately $371 million.

The principal methodology used in this rating 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.

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.

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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.

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

Peter H. Abdill, CFA
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

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

Moody's rates Ikaria's LBO debt and assigns B2 CFR; outlook stable
No Related Data.
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