(The following statement was released by the rating agency)
Oct 10 - Overview
-- Research Triangle Park, N.C.-based contract services provider Quintiles Transnational Corp. is issuing $175 million in incremental term debt to 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 rating on operating subsidiary Quintiles Transnational Corp., the 'BB-' issue-level rating and '4' recovery rating on that entity's existing senior secured debt, and the 'B' issue-level rating and '6' recovery rating on the holding company's term loan.
-- The stable rating outlook reflects our expectation that the company will operate with debt to EBITDA of less than 5x and that growing EBITDA and continued free cash flow generation will result in adjusted leverage that will decline to the high 4x range by year end.
Rating Action On Oct. 10, 2012, Standard & Poor's Ratings Services assigned Quintiles Transnational Corp.'s proposed $175 million incremental term loan due 2018 its 'BB-' issue-level rating with a recovery rating of '4', indicating our expectation for average (30% to 50%) recovery for lenders in the event of a payment default. The company will use proceeds from the loan, along with $75 million of cash, to pay a $246 million shareholder distribution and fees associated with the term loan.
At the same time, we are affirming our 'BB-' corporate credit rating on operating subsidiary Quintiles Transnational Corp., our 'BB-' issue-level rating and '4' recovery rating (30% to 50% recovery expectation) on that entity'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 term loan.
The ratings on Quintiles Transnational Corp. reflect the company's "aggressive" financial policy, characterized by pro forma lease-adjusted debt to EBITDA slightly above 5x and a shareholder-friendly financial policy that has resulted in two debt-financed dividends this year. The ratings also reflect Quintiles' "satisfactory" business risk profile, supported by the company's industry-leading market position in the growing contract research (CRO) industry.
Quintiles' aggressive financial risk profile reflects a financial policy that uses excess cash and debt capacity for dividends. Pro forma debt to EBITDA as of June 30, 2012, was 5.1x, reflecting the addition of $475 million of new debt this year (including $175 million from this transaction) to fund shareholder distributions. Although we believe EBITDA growth will result in declining debt leverage over time, we believe Quintiles will use its growing excess debt capacity for additional dividends and will maintain leverage in the 4x to 5x range over the longer term.
Based on our expectation that the company can sustain first-half operating trends in the second half of the year, we believe that leverage will decline from just over 5x, pro forma the transaction, to the high-4x range by year end. We expect funds from operations to debt to remain in the low to mid teens, pro forma the debt issuance.
Quintiles' position as the largest CRO providing services to the pharmaceutical and biotechnology industries is a crucial factor supporting the satisfactory business risk profile. We expect industry conditions to continue to improve, which we believe will result in mid- to high-single-digit revenue and EBITDA growth in 2013. We believe that Quintiles can sustain this level of organic growth over the intermediate term based on our expectation of increased outsourcing by larger pharmaceutical companies, modest increases in research and development (R&D) budgets as pharmaceutical and biotechnology companies seek to refill product pipelines, and our belief that an increasing amount of drug approvals will come from smaller pharmaceutical and biotechnology companies. These smaller companies often lack the infrastructure to perform certain clinical development services internally. At the same time, we expect Quintiles to benefit from an ongoing trend among large pharmaceutical companies toward forming strategic partnerships with a smaller number of large, global CROs. Over time, we expect that this will shift some market share from the smaller CROs to the largest global players like Quintiles.
The company offers an array of services within its two key segments--the clinical development and consulting segment and the commercial solutions segment--giving it some revenue diversity. However, Quintiles still depends on pharmaceutical industry R&D spending. While Quintiles' scale and focus on the late-stage segment of the market is a mitigating factor, contract cancelations remain a risk because sponsors (or, in some cases, regulators) can cancel trials with very little notice.
We view Quintiles' liquidity as "strong." Sources of cash are likely to exceed mandatory 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 least 1.5x over the next 12 months.
-- If EBITDA declines by 50%, we expect liquidity sources to continue exceeding uses.
-- With its ample cash balance and revolver availability, we believe Quintiles can absorb, without refinancing, high-impact, low-probability events.
-- We expect the company to generate cash flows sufficient to handle its obligations under its debt burden. Quintiles faces no significant debt maturities over the next several years.
-- Capital expenditures, working capital needs, and tuck-in acquisitions are all expected to be comfortably supported by existing liquidity.
Recovery analysis For the complete recovery analysis, please see the recovery report to be published following this report on RatingsDirect.
Our stable rating outlook on Quintiles reflects our expectation that it will maintain its market-leading position in an industry that we expect to have solid long-term growth prospects. While adjusted debt to EBITDA increases to just over 5x with the new debt issuance, we expect debt leverage to be below 5x by year end due to EBITDA growth. We also expect funds from operations to total debt to be sustained in the low teens.
Despite our belief that Quintiles will generate meaningful cash flow over the next year, we expect that the company will direct its cash flow toward growth objectives and further shareholder dividends. If the company demonstrates a commitment to directing free cash flow toward repaying debt and reduces leverage to around 3.5x, we could raise the rating. However, we view this as unlikely under the current ownership structure.
We could lower the rating if the company adopts a more aggressive financial policy, resulting in debt financed dividends that increase leverage to above 5x on a sustained basis. We would also consider a lower rating if the industry were to reenter a steep downturn and Quintiles suffered a significant operating shortfall that causes EBITDA to decline and debt leverage to rise above 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-Grade Credits, 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 List Ratings Affirmed Quintiles Transnational Corp. Corporate Credit Rating BB-/Stable/-- Senior Secured BB- Recovery Rating 4
Quintiles Transnational Holdings Inc.
Senior Secured B Recovery Rating 6 New Rating Quintiles Transnational Corp. $175M sr secd loan due 2018 BB- Recovery Rating 4
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. All ratings affected by this rating action can be found on Standard & Poor's public Web site at . Use the Ratings search box located in the left column. (New York Ratings Team)