Rating Action: Moody's assigns Baa3 to Royalty Pharma's sr. unsecured notes
Global Credit Research - 19 Aug 2020
New York, August 19, 2020 -- Moody's Investors Service ("Moody's") assigned a Baa3 rating to the new senior unsecured notes being issued by Royalty Pharma plc ("Royalty Pharma"). The outlook is stable.
Proceeds of the offering are to fully repay existing term loan indebtedness at indirect subsidiary RPI 2019 Intermediate Finance Trust. The Baa3 rating on the term loan will be withdrawn at the close of the transaction.
"Royalty Pharma's investment grade rating reflects the company's successful track record in acquiring royalty streams on leading pharmaceutical products with strong growth outlooks," stated Michael Levesque, Moody's Senior Vice President.
Assignments:
..Issuer: Royalty Pharma plc
....Senior Unsecured Regular Bond/Debenture, Assigned Baa3
Outlook Actions: ..Issuer: Royalty Pharma plc ....Outlook, Assigned Stable RATINGS RATIONALE
Royalty Pharma's Baa3 rating reflects the strong product portfolio underlying the company's royalty streams. It also reflects the company's excellent track record of successfully acquiring royalty interests on blockbuster drugs. Royalties on products acquired in the last several years such as Imbruvica and cystic fibrosis drugs have strong growth prospects and will provide long-tailed revenue streams. The company's strong cash flow provides opportunities to continue investing in new royalties.
Offsetting these strengths, Royalty Pharma faces execution risk in its ongoing reinvestment phase, following recent and upcoming royalty terminations on earlier investments. Social risks related to drug pricing proposals could dampen the company's return on investment. In addition, there will remain some revenue concentration, with the three largest royalty streams generally representing 50%-60% of the total. Financial leverage is moderately high for the level of business risk, with debt/EBITDA that Moody's anticipates will average 3.0x to 3.5x over time.
The unsecured bonds have the potential to become contractually subordinated to any secured debt that the company may incur in the future. The bond indenture as well as the new senior unsecured revolving credit agreement have some limitations on liens, helping to reduce this risk.
Social and governance risks are material to Royalty Pharma's ratings. Social risks include exposure to legislative actions aimed at curbing prescription drug prices, which are rising because of demographics and societal trends. Some drugs in Royalty Pharma's portfolio, including Imbruvica, Xtandi and Erleada, have significant use within the Medicare Part D program - an area of increasing focus for drug pricing reform.
Governance considerations include a financial policy that Moody's views as consistent with an investment grade rating, based on debt/EBITDA that has averaged between 3.0x and 3.5x over many years. While the company pays distributions, Moody's anticipates that these will be limited to around 25% of cash flow, with the vast majority of cash flow being deployed to acquire new royalty streams.
The outlook is stable, reflecting Moody's expectation that debt/EBITDA will be sustained below 4.0x.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
Factors that could lead to an upgrade include successful replenishment of terminating royalties with new investments, and improvement in revenue diversity such that the top 3 drugs represent less than 40% of revenue. Specifically, debt/EBITDA sustained below 3.0 times could support an upgrade.
Factors that could lead to a downgrade include significant disruption in royalties on any core products, a reduction in revenue diversity, or debt/EBITDA sustained above 4.0 times.
Domiciled in England, Royalty Pharma plc is engaged in the business of acquiring royalty interests in various pharmaceutical and biotechnology products from universities, inventors, and pharmaceutical companies. Pro forma annual drug royalties adjusted for non-controlling interests is approximately $1.7 billion.
The principal methodology used in these ratings was Pharmaceutical Industry published in June 2017 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1062755. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.
REGULATORY DISCLOSURES
For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.
For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.
The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.
These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.
Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.
Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.
At least one ESG consideration was material to the credit rating action(s) announced and described above.
The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.
Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.
Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.
Michael Levesque, CFA Senior Vice President Corporate Finance Group Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 Jessica Gladstone, CFA Associate Managing Director Corporate Finance Group JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 Releasing Office: Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653
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