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Rating Action: Moody's downgrades Alcami's CFR to Caa2; outlook negative
Global Credit Research - 16 Jul 2020
New York, July 16, 2020 -- Moody's Investors Service, ("Moody's") downgraded Alcami Corporation's ("Alcami") ratings, including the Corporate Family Rating (CFR) to Caa2 from Caa1 and the Probability of Default Rating to Caa2-PD from Caa1-PD. Moody's also downgraded the first lien senior secured bank credit facility rating to Caa1 from B3. The outlook is negative.
The downgrade to Caa2 reflects Alcami's very high financial leverage and expected headwinds throughout 2020, which will lead to further weakening of credit metrics. Moody's expects adjusted debt/EBITDA will continue to exceed 10x (as per Moody's definition, which differs from the credit agreement calculation) over the next 12-18 months - an unsustainably high level. The downgrade also reflects the company's limited liquidity runway given material expected cash burn over the next several quarters. This will be due, in part, to elevated capital expenditures required to invest in the recently acquired TriPharm Services in order to fully operationalize the assets. Given very high leverage and weak liquidity, the downgrade also reflects the increased probability that Alcami will pursue a transaction that Moody's would consider a distressed exchange, and hence a default under Moody's definition.
The following ratings for Alcami Corporation were downgraded:
Corporate Family Rating, to Caa2 from Caa1
Probability of Default Rating, to Caa2-PD from Caa1-PD
Senior secured first lien revolving credit facility expiring 2023 to Caa1 (LGD3) from B3 (LGD3)
Senior secured first lien term loan due 2025 to Caa1 (LGD3) from B3 (LGD3)
- Outlook, changed to Negative from Stable
Alcami's Caa2 CFR reflects the company's weak credit profile, evidenced in part by very high financial leverage well in excess of 10 times on a Moody's adjusted debt/EBITDA basis, and weak interest coverage of -0.5x for the twelve months ended March 31, 2020. The rating also reflects Alcami's modest scale relative to more established Contract Development and Manufacturing Organizations ("CDMO"), such as Catalent Pharma Solutions, Inc. (B1 stable) and Patheon (owned by Thermo Fisher Scientific Inc., Baa1 stable). These competitors are both roughly 8-9 times the size of Alcami and are able offer greater capabilities to pharmaceutical/biotech customers. The rating is further constrained by the high regulatory risk and compliance costs inherent in the CDMO industry. The company's financial policies are expected to be relatively aggressive, in accordance with its private equity ownership.
The rating is supported by Moody's view that fundamental demand for pharmaceutical development and manufacturing services will be robust. Demand will continue to grow as pharmaceutical companies increasingly outsource development and manufacturing of complex products. If Alcami can continue to improve its operating performance and successfully bring its TriPharm investment online, it would be well positioned to benefit from this growing demand given its full suite of services. Moody's estimates that the industry will grow at a mid-single-digit rate over the next few years.
Moody's believes that Alcami's liquidity will be weak over the next 12-15 months. As of March 31, 2020, Alcami had $8 million of cash and Moody's anticipates negative free cash flow over the next several quarters, absent significant improvement in earnings. This will constrain liquidity and result in reliance on the revolving credit facilities which include a $50 million revolving credit facility due in 2023 ($7 million drawn as of March 31, 2020), as well as $16 million of availability under new and undrawn asset based credit line.
The negative rating outlook reflects Moody's expectation that Alcami will continue to face challenges in stabilizing and improving operating performance, and that free cash flow will remain negative over the next 12 months.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
The ratings could be downgraded if liquidity weakens or operating performance deteriorates further. Increased likelihood of an event of default or reduced recovery expectations for lenders could also lead to a rating downgrade.
The ratings could be upgraded if Alcami is able to effectively turn-around the business through prudent cost savings and new business wins, resulting in a higher probability that Alacami's capital structure is sustainable. Specifically, material improvement in free cash flow generation and reduction in debt to EBITDA could support an upgrade.
Alcami Corporation is an integrated contract development & manufacturing organization. The company develops and manufactures both active pharmaceutical ingredients and finished drug product for its customers. It also provides lab services, such as formulation development, and packaging. The company is majority-owned by private equity firm Madison Dearborn Partners. During the twelve-month period ended March 31, 2020, the company generated approximately $197 million of revenue.
The principal methodology used in these ratings was Business and Consumer Service Industry published in October 2016 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1037985. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.
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.
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.
Vladimir M. Ronin, CFA Analyst 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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