CHICAGO--(BUSINESS WIRE)--Fitch Ratings has affirmed the ratings of RPI Finance Trust (RPI FT), including the 'BBB-' Issuer Default Rating (IDR). The rating action applies to approximately $3.4 billion of debt outstanding on March 31, 2014. The Rating Outlook is Stable.
A full list of ratings follows at the end of this press release.
KEY RATING DRIVERS
--RPI FT generates strong EBITDA with margins annually exceeding 99% due to modest operating costs.
--Over the next three years, RPI FT will experience pressure on revenues as patents lapse for pharmaceuticals that underlie nearly 32% of the company's royalty stream.
--Fitch expects debt leverage (total debt to EBITDA) to hover around 3.0x through the ratings horizon, absent leveraging asset purchases, as debt reduction offsets EBITDA pressure from expiring royalty-bearing assets. RPI FT's debt leverage was 2.8 times (x) in 2013 compared to 3.2x at the end of 2012.
--A new investment horizon is approaching and is expected that by the end of 2015 that RPI FT's structure will once again reorganize. It is currently unknown whether another division in assets may occur akin to 2011, but initial work toward addressing the event will likely begin over near term.
High Operating Leverage
RPI FT generates solid earnings from its royalty streams since modest operating expenses result in EBITDA margins exceeding 99% annually. The company generated EBITDA of $1.2 billion in 2013 compared to $1.1 billion in 2012. Fitch anticipates operating costs to remain low leading to sustained high EBITDA margins.
Royalty Stream Trickles Down
Fitch sees patent expirations of pharmaceuticals that drive RPI FT's revenues ramping up over the next few years. Presently the maturing drugs over the next three years represented nearly 32% of the company's royalty stream at the end of 2013. As such, Fitch anticipates low- to mid-single digit revenue and earnings declines over the ratings horizon. Fitch anticipates the company to pursue new opportunities to extend the useful life of its aging asset portfolio.
Given moderate asset purchasing throughout the current year, RPI FT's debt leverage has moderated to approximately 2.8x in 2013 from 3.2x at the end of 2012, benefiting from incremental debt repayment beyond scheduled amortization and EBITDA growth. An excess free cash flow recapture provision in the company's $3.5 billion secured term loan B facilities bolsters debt reduction. Fitch expects leverage to hover around 3.0x as debt reduction is offset by EBITDA pressure from expiring royalty-bearing assets.
Solid Liquidity Maintained
Fitch believes that RPI FT will maintain free cash flow margins above 40% over the ratings horizon despite some pressures on revenues and EBITDA, and generous distributions to equity holders. RPI FT generated FCF margins of 48.4% and 47.9% in 2013 and 2012, respectively. Fitch assumptions include annual dividends around 45% of EBITDA to unit holders, a level permitted under the company's credit facilities.
Investment Event on the Horizon
An investment event dictated by RPI FT's guidelines must take place in 2015 or all investment activity will cease. The strategy for the prior event in 2011 resulted in a split (a highly lengthy process) of Royalty Pharma into two new finance subsidiaries: Royalty Pharma Investments (RPI) and Royalty Pharma Select (RP Select). It is unknown whether another division in assets may occur, but initial work toward addressing the event will begin in the near term.
An upgrade is unlikely for RPI FT given the company's business strategy is reliant on active asset purchasing that can stretch leverage to a level no longer consistent with the current 'BBB-' rating. Uncertainty surrounding the approaching investment event in 2015 also limits ratings upside.
A downgrade would result from an intention to completely wind down the royalty-bearing assets, most probable during an investment event, next expected to occur in 2015. A fall in anticipated cash flows such that outstanding debt level cannot be satisfied will pressure the rating as well. In addition, downward action would result from an inability or unwillingness to rapidly reduce high debt leverage following leveraging asset acquisitions.
Fitch has affirmed RPI FT's ratings as follows:
--Issuer Default Rating (IDR) at 'BBB-';
--Senior secured bank loan rating at 'BBB-'.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 8, 2012).
Applicable Criteria and Related Research:
Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage