(The following statement was released by the rating agency)
Oct 10 - Overview
-- Research Triangle Park, N.C.-based contract services providerQuintiles Transnational Corp. is issuing $175 million in incremental term debtto fund a shareholder distribution.
-- We are assigning the new term loan our 'BB-' issue-level rating with a'4' recovery rating (the same as the existing loan).
-- At the same time, we are affirming our 'BB-' corporate credit ratingon operating subsidiary Quintiles Transnational Corp., the 'BB-' issue-levelrating and '4' recovery rating on that entity's existing senior secured debt,and the 'B' issue-level rating and '6' recovery rating on the holdingcompany's term loan.
-- The stable rating outlook reflects our expectation that the companywill operate with debt to EBITDA of less than 5x and that growing EBITDA andcontinued free cash flow generation will result in adjusted leverage that willdecline to the high 4x range by year end.
Rating ActionOn Oct. 10, 2012, Standard & Poor's Ratings Services assigned QuintilesTransnational Corp.'s proposed $175 million incremental term loan due 2018 its'BB-' issue-level rating with a recovery rating of '4', indicating ourexpectation for average (30% to 50%) recovery for lenders in the event of apayment default. The company will use proceeds from the loan, along with $75million of cash, to pay a $246 million shareholder distribution and feesassociated with the term loan.
At the same time, we are affirming our 'BB-' corporate credit rating onoperating subsidiary Quintiles Transnational Corp., our 'BB-' issue-levelrating and '4' recovery rating (30% to 50% recovery expectation) on thatentity's existing senior secured debt, and our 'B' issue-level rating and '6'recovery rating (0% to 10% recovery expectation) on the holding company's termloan.
The ratings on Quintiles Transnational Corp. reflect the company's"aggressive" financial policy, characterized by pro forma lease-adjusted debtto EBITDA slightly above 5x and a shareholder-friendly financial policy thathas resulted in two debt-financed dividends this year. The ratings alsoreflect Quintiles' "satisfactory" business risk profile, supported by thecompany's industry-leading market position in the growing contract research(CRO) industry.
Quintiles' aggressive financial risk profile reflects a financial policy thatuses excess cash and debt capacity for dividends. Pro forma debt to EBITDA asof June 30, 2012, was 5.1x, reflecting the addition of $475 million of newdebt this year (including $175 million from this transaction) to fundshareholder distributions. Although we believe EBITDA growth will result indeclining debt leverage over time, we believe Quintiles will use its growingexcess debt capacity for additional dividends and will maintain leverage inthe 4x to 5x range over the longer term.
Based on our expectation that the company can sustain first-half operatingtrends in the second half of the year, we believe that leverage will declinefrom just over 5x, pro forma the transaction, to the high-4x range by yearend. We expect funds from operations to debt to remain in the low to midteens, pro forma the debt issuance.
Quintiles' position as the largest CRO providing services to thepharmaceutical and biotechnology industries is a crucial factor supporting thesatisfactory business risk profile. We expect industry conditions to continueto improve, which we believe will result in mid- to high-single-digit revenueand EBITDA growth in 2013. We believe that Quintiles can sustain this level oforganic growth over the intermediate term based on our expectation ofincreased outsourcing by larger pharmaceutical companies, modest increases inresearch and development (R&D) budgets as pharmaceutical and biotechnologycompanies seek to refill product pipelines, and our belief that an increasingamount of drug approvals will come from smaller pharmaceutical andbiotechnology companies. These smaller companies often lack the infrastructureto perform certain clinical development services internally. At the same time,we expect Quintiles to benefit from an ongoing trend among largepharmaceutical companies toward forming strategic partnerships with a smallernumber of large, global CROs. Over time, we expect that this will shift somemarket share from the smaller CROs to the largest global players likeQuintiles.
The company offers an array of services within its two key segments--theclinical development and consulting segment and the commercial solutionssegment--giving it some revenue diversity. However, Quintiles still depends onpharmaceutical industry R&D spending. While Quintiles' scale and focus on thelate-stage segment of the market is a mitigating factor, contract cancelationsremain a risk because sponsors (or, in some cases, regulators) can canceltrials with very little notice.
We view Quintiles' liquidity as "strong." Sources of cash are likely to exceedmandatory uses of cash over the next 12 months. Our assessment of Quintiles'liquidity profile incorporates the following expectations and assumptions:
-- Our expectation that liquidity sources will exceed uses by at least1.5x over the next 12 months.
-- If EBITDA declines by 50%, we expect liquidity sources to continueexceeding uses.
-- With its ample cash balance and revolver availability, we believeQuintiles can absorb, without refinancing, high-impact, low-probability events.
-- We expect the company to generate cash flows sufficient to handle itsobligations under its debt burden. Quintiles faces no significant debtmaturities over the next several years.
-- Capital expenditures, working capital needs, and tuck-in acquisitionsare all expected to be comfortably supported by existing liquidity.
Recovery analysisFor the complete recovery analysis, please see the recovery report to bepublished following this report on RatingsDirect.
Our stable rating outlook on Quintiles reflects our expectation that it willmaintain its market-leading position in an industry that we expect to havesolid long-term growth prospects. While adjusted debt to EBITDA increases tojust over 5x with the new debt issuance, we expect debt leverage to be below5x by year end due to EBITDA growth. We also expect funds from operations tototal debt to be sustained in the low teens.
Despite our belief that Quintiles will generate meaningful cash flow over thenext year, we expect that the company will direct its cash flow toward growthobjectives and further shareholder dividends. If the company demonstrates acommitment to directing free cash flow toward repaying debt and reducesleverage to around 3.5x, we could raise the rating. However, we view this asunlikely under the current ownership structure.
We could lower the rating if the company adopts a more aggressive financialpolicy, resulting in debt financed dividends that increase leverage to above5x on a sustained basis. We would also consider a lower rating if the industrywere to reenter a steep downturn and Quintiles suffered a significantoperating shortfall that causes EBITDA to decline and debt leverage to riseabove 5x.
Related Criteria And Research
-- Methodology: Business Risk/Financial Risk Matrix Expanded, Sept. 18,2012
-- Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011
-- Use Of CreditWatch And Outlooks, Sept. 14, 2009
-- Criteria Guidelines For Recovery Ratings, Aug. 10, 2009
-- Standard & Poor's Revises Its Approach To Rating Speculative-GradeCredits, May 13, 2008
-- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008
-- 2008 Corporate Criteria: Rating Each Issue, April 15, 2008
-- 2008 Corporate Criteria: Ratios And Adjustments, April 15, 2008
Ratings ListRatings AffirmedQuintiles Transnational Corp.Corporate Credit Rating BB-/Stable/--Senior Secured BB-Recovery Rating 4
Quintiles Transnational Holdings Inc.
Senior Secured BRecovery Rating 6New RatingQuintiles Transnational Corp.$175M sr secd loan due 2018 BB-Recovery Rating 4
Complete ratings information is available to subscribers of RatingsDirect onthe Global Credit Portal at
. All ratings affectedby this rating action can be found on Standard & Poor's public Web site at. Use the Ratings search box located in the leftcolumn.(New York Ratings Team)