On April 24, 2007, Standard & Poor's Ratings Services assigned its loan and recovery ratings to New York, N.Y.-based
Royalty Pharma Finance Trust's (Royalty Pharma) $1.4 billion senior secured term loan due 2013. The term loan is rated 'BB+' (the same as the corporate credit rating on
Royalty Pharma) with a recovery rating of '2', indicating a substantial (80%-100%) expectation of recovery of principal in the event of a payment default.
(For the latest corporate credit rating rationale, see Standard & Poor's
research report on Royalty Pharma published earlier today.)
Table 1
Royalty Pharma--Credit Profile
Corporate credit rating
BB+/Positive/--
Facility/Issue
Issue rating
Recovery rating
Expected recovery (%)
Maturity
Repayment
$1.4 billion senior secured term loan
BB+
2
80-100
2013
Bullet
Recovery Analysis
Simulated default scenario
Standard & Poor's believes the most likely path to default would involve a significant decline in royalty revenue and earnings at Royalty Pharma, resulting from a falloff in sales of several of its major products due to drop in demand and/or market withdrawal of a product.
Our simulated default scenario contemplates:
A drop-off of Royalty Pharma's EBITDA, challenging the company's ability to meet its debt service requirements;
A first priority perfected lien on Royalty Pharma's rights in each of its patents, license agreements, or royalty agreements, and the capital stock of the company and its subsidiaries;
A 200-basis-point increase in LIBOR because of rising interest rates; and
A 200-basis-point increase due to deterioration of credit quality.
Valuation
With a diverse portfolio of royalty-generating pharmaceutical assets and a growing track record or performance, Royalty Pharma is one of the leading companies that specialize in the acquisition of drug royalty interests. The company primarily targets drugs that are critical care treatments, are approved and have been on the market for at least several years, have a well established safety record, have long remaining patent lives, and are promoted by strong marketers. Royalty Pharma has interests in several market leading products, including Amgen Inc.'s Neupogen/Neulasta, Abbott Laboratories' Humira, and Genentech Inc.'s Rituxan.
Consequently, we used an enterprise value methodology to gauge recovery prospects, employing a distressed EBITDA multiple of 8x.
Results
Using the 8x multiple under our simulated default scenario, we expect substantial (80%-100%) recovery of principal for the secured lenders.
Transaction Summary
Table 2
Transaction Summary
Borrower
Royalty Pharma Finance Trust
Structure
The senior secured term loan facility will amortize at a rate of 1% per annum, with the remainder due in full at maturity.
Security package
First lien on all of Royalty Pharma's rights in each of the patents, license agreements or royalty agreements, and the capital stock of Royalty Pharma and its subsidiaries.
Legal jurisdiction/issues
No material issues.
Key covenants
Maximum leverage ratio (debt/adjusted EBITDA) of 4.5x with a step-down to 4x at Dec. 31, 2009. Also, minimum coverage ratio of 3x with step-up to 3.5x at Dec. 31, 2009.
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