Fitch Affirms RPI Finance Trust's IDR at 'BBB-'; Outlook Stable

CHICAGO--()--Fitch Ratings has affirmed the ratings of RPI Finance Trust (RPI FT), including the 'BBB-' Issuer Default Rating (IDR), following the acquisition of royalty-bearing assets linked to Vertex Pharmaceutical Inc.'s (Vertex) cystic fibrosis treatment Kalydeco. The rating action applies to approximately $3.3 billion of debt outstanding as of Sept. 30, 2014. The Rating Outlook is Stable.

A full list of rating actions follows at the end of this press release.

KEY RATING DRIVERS

-- The acquisition of certain rights to the Kalydeco franchise for $3.3 billion, while leveraging, is consistent with RPI FT's strategy to invest in long-term attractive royalty-bearing assets. The purchase mitigates pressure on revenues as patents lapse for pharmaceuticals that underlie nearly 32% of the company's royalty stream over the next three years.

-- As a result of the transaction, Fitch expects debt leverage (total debt to EBITDA) to rise to 4.5x at the end of 2014 from below 2.5x currently. Absent further-leveraging asset purchases, Fitch sees leverage dropping to below 4x in 2015 and 3x in 2016 driven by a combination of EBITDA growth and rapid debt reduction facilitated by an excess cash flow recapture provision in the company's credit facilities.

-- A new investment horizon is approaching and it is expected that by the end of 2015, RPI FT's structure may once again change. It is unknown whether another division in assets may occur akin to 2011, but initial work toward addressing the event will likely begin over the near term.

RATING SENSITIVITIES

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 the investment event, expected to occur in 2015. A fall in cash flows such that the anticipated total no longer matches the outstanding debt level would pressure the rating as well. In addition, downward action would result from an inability or unwillingness to reduce high debt leverage rapidly following leveraging asset acquisitions.

Portfolio life extended by acquisition:

Fitch's concern about patent expirations of pharmaceuticals over the next few years that drive RPI FT's revenues has been addressed by the addition of rights to the Kalydeco franchise, including developmental projects, as well as higher-than-expected milestone payments related to sales of Biogen IDEC Inc.'s multiple sclerosis medicine Tecfidera. Maturing drugs over the next three years represented 32% of the company's royalty stream at the end of 2013. Fitch now sees mid-double-digit revenue and earnings increases over the ratings horizon. The transaction also increased the average weighted life of the company's royalty-bearing asset portfolio to around 11 years from eight years.

Leverage temporarily increases:

RPI FT's debt leverage will rise to 4.5x at the end of 2014 from approximately 2.3x currently, in conjunction with incremental debt needed to fund the recent $3.3 billion acquisition. Fitch believes that gross debt leverage will quickly fall to below 4x in 2015 and below 3x in 2016 driven by debt paydown required by excess free cash flow recapture in the company's secured term loan B facilities. The provision calls for 50% or 25% of excess cash flow to be applied to debt reduction if gross leverage is above or below 3.5x, respectively.

Investment event nearing:

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.

Fitch has affirmed the following ratings of RPI FT:

--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' May 28, 2014

Applicable Criteria and Related Research:

Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749393

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=931455

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Contacts

Fitch Ratings
Primary Analyst
Michael Zbinovec, +1-312-368-3164
Senior Director
Fitch Ratings, Inc.
70 West Madison Street
Chicago, IL 60602
or
Secondary Analyst
Megan Neuburger, +1-212-908-0501
Senior Director
or
Chairperson
Mike Weaver, +1-312-368-3156
Managing Director
or
Media Relations
Brian Bertsch, New York, +1 212-908-0549
brian.bertsch@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Michael Zbinovec, +1-312-368-3164
Senior Director
Fitch Ratings, Inc.
70 West Madison Street
Chicago, IL 60602
or
Secondary Analyst
Megan Neuburger, +1-212-908-0501
Senior Director
or
Chairperson
Mike Weaver, +1-312-368-3156
Managing Director
or
Media Relations
Brian Bertsch, New York, +1 212-908-0549
brian.bertsch@fitchratings.com