(The following statement was released by the rating agency)
CHICAGO, May 16 (Fitch) Fitch Ratings has placed the ratings of RPI Finance
Trust (RPI FT), including the 'BBB-' Issuer Default Rating (IDR), on Rating
Watch Negative. The rating action follows RPI FT's intention to acquire Elan
Corp. plc (Elan). The rating action applies to approximately $3.5 billion of
debt outstanding on Dec. 31, 2012. A full list of ratings placed on Negative
Watch is listed below.
Fitch placed RPI FT's IDR on Negative Watch given incremental debt required for
the potential acquisition of Elan which would pressure the credit profile and
possibly lead to a downgrade of the ratings. RPI FT's interest in Elan lies
primarily in the royalty-bearing interest in the multiple-sclerosis medicine
Tysabri. RPI FT initiated the acquisition process under Irish takeover rules on
May 2, when the company made a formal offer of $11.25 per share to Elan
shareholders. The process runs 60 days and may involve revisions to the current
offer price. The outcome to RPI FT's credit profile is uncertain and could be
influenced over the next two months by:
--The offer price, which could increase to garner more shareholder interest.
--The incremental debt needed to complete the transaction. Fitch expects cash on
hand and equity proceeds to partially fund the acquisition; however, leverage
may approximate 5.0x on a pro forma basis with additional debt upon closing of
--Plans for debt reduction over the next 18 months following the transaction, if
--The outcome of the potential transaction between Elan and Theravance Inc.
(Theravance) in which Elan would buy royalty-bearing interests in a portfolio of
Theravance's respiratory treatments. The transaction would cost $1 billion,
essentially erasing one-half of Elan's present cash balance, with an expectation
to close by the end of June.
--Any changes to the terms of the bank credit facilities that could potentially
accelerate debt repayment through the excess cash flow recapture provision.
KEY RATING DRIVERS
Average Life of Royalty Portfolio to Increase:
RPI FT shares a portfolio of 38 royalty-bearing interests with RP Select Finance
Trust due to an investment event that occurred in August 2011. In 2012, RPI FT
acquired around $900 million of new assets including the purchase of an interest
in an earn-out pertaining to the recently launched multiple sclerosis medicine,
Biogen's Tecfidera (BG-12). Given the new assets, the weighted average useful
life of the portfolio is estimated at 7.0 years. The addition of the Tysabri
royalty, which does not expire, would push useful life to beyond 13 years.
Fitch expects RPI FT to maintain a weighted average useful life of the
diversified asset portfolio commensurate with the leverage and debt maturity
EBITDA Generation and FCF Remain Strong:
RPI FT's low operating expense base results in exceptional EBITDA generation,
which was approximately $1.1 billion in 2012 representing a margin of greater
than 99%. Fitch anticipates operating costs to remain low, yielding sustained
high EBITDA margins through the ratings horizon. Fitch believes that RPI FT will
maintain free cash flow margins above 30% over the ratings horizon despite
generous distributions to equity holders of around 45% of EBITDA. RPI FT had
cash and cash equivalents of $1.1 billion at the end of 2012. Debt maturities
are highly manageable over the intermediate term and are isolated to 1%
amortization of secured term loan B facilities.
Positive rating action is unlikely for RPI FT as any reduction in leverage
signals future acquisition activity.
A downgrade would result from RPI FT's inability to rapidly reduce high leverage
to below 3.5x following the leveraging acquisition of Elan, if the company is
successful in its takeover effort. In addition, an intention to completely wind
down the royalty-bearing assets would pressure the rating. A fall in the
average weighted useful life of the royalty asset portfolio such that it is no
longer commensurate with the debt maturity schedule will also pressure the
Fitch has placed the following ratings of RPI FT on Rating Watch Negative:
--Issuer Default Rating (IDR) at 'BBB-';
--Senior secured bank loan rating at 'BBB-'.
Fitch Ratings, Inc.
70 West Madison Street
Chicago, IL 60602
Media Relations: Brian Bertsch, New York, Tel: +1 212-908-0549, Email:
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
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