Fitch Upgrades RP Select Finance Trust's Ratings to 'BBB'; Outlook Stable
CHICAGO--(BUSINESS WIRE)--Fitch Ratings has upgraded RP Select Finance Trust's (RP Select FT) IDR (Issuer Default Rating) to 'BBB' from 'BBB-'. The Rating Outlook is revised to Stable from Positive. The ratings apply to approximately $434 million of outstanding debt. See a full list of ratings at the end of this release.
KEY RATING DRIVERS
-- RP Select FT 's royalty stream requires minimal operational expenses, leading to EBITDA margins exceeding 99% annually.
-- Debt leverage has wound down rapidly to 1.5x at the end of 2013 from 2.4x in the prior year driven by mandatory prepayments under RP Select FT's secured credit facility. Fitch sees further improvement despite moderating EBITDA due to a maturing royalty stream.
-- Pharmaceutical patents expiring over the next three years underlie 31% of RP Select FT's royalty revenues. New royalty interests to supplant the expiring assets in the company's portfolio are restricted under an investment event in 2011 (described below).
EXCESS CASH FLOW RECAPTURE DRIVES LEVERAGE IMPROVEMENT
Total leverage (total debt-to-EBITDA) fell to 1.5x at the end of 2013 from 2.4x in 2012 accelerated by a mandatory prepayment provision in RP Select FT's $850 million secured term-loan agreement. The combination of scheduled debt amortization and prepayment from excess cash flow led to a decrease in the debt load of $197.6 million in 2013. Fitch believes that leverage will drop below 1.0x by the end of 2015 as further debt reduction driven by excess free cash flow recapture more than offsets moderating EBITDA.
HIGH OPERATING LEVERAGE FROM LOW OVERHEAD
RP Select FT's low operating expenses provide for exceptional EBITDA generation and yielded EBITDA margins of 99.9% in both 2013 and 2012. Operating costs are limited to management expenses, and trustee and financing fees. The company incurs no expenses for locating new revenue sources, as an investment event in August 2011 bars the company from sharing any new assets from the beginning of 2012. Fitch anticipates operating costs to remain low, resulting in sustained high EBITDA margins through the ratings horizon.
STRONG FREE CASH FLOW DESPITE HEAVY DISTRIBUTIONS
Fitch sees sustained strong FCF exceeding 70% of royalty revenues until final scheduled repayment of outstanding term-loan borrowings in 2016. The assumption includes RP Select FT making annual special distributions to unit holders totaling 20% of EBITDA through 2015. The company reduced distributions in 2013 to $18 million from $60.5 million in 2012, as a one-time $50 million special distribution in November 2012 did not repeat last year.
DEBT OVER-COLLATERALIZED BY CURRENT ASSET VALUATION
Fitch estimates that RP Select FT's cumulative royalties from a shared royalty interest portfolio in 2014 to 2016 exceed outstanding debt obligations under its secured credit facility. RP Select FT shares a portfolio of 38 royalty-bearing interests with RPI Finance Trust starting from the investment event in August 2011, whereby RP Select FT receives 20% and RPI Finance Trust gets 80% of cash flows derived from the asset portfolio. Fitch calculates cumulative royalties from RP Select FT's share in 2014-2016 at $789.8 million, which easily covers the $433.6 million of outstanding term loans at the end of the first quarter of 2014. Fitch's main concern is matching the value of the RP Select FT's share of the royalty-bearing assets with its financial obligations through maturity.
Fitch sees further positive rating action as unlikely given that the value of the portfolio of royalty-bearing assets continues to diminish from patent expirations of the pharmaceuticals underlying the royalty stream. Weakening operational performance shown by declining revenues limit positive momentum despite the company's outstanding debt obligations quickly winding down through maturity in 2016.
While unlikely, a significant and rapid fall in the value of the royalty asset portfolio such that it is no longer commensurate with the debt maturity schedule would pressure the rating.
Fitch upgrades RP Select FT's ratings as follows:
--Issuer Default Rating (IDR) to 'BBB' from 'BBB-';
--Senior secured bank loan rating to 'BBB' from 'BBB-'.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
-- 'Corporate Rating Methodology' dated August 8, 2012
Applicable Criteria and Related Research:
Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage