Rating Action: Moody's assigns Ba2 CFR to Emergent BioSolutions
Global Credit Research - 04 Aug 2020
New York, August 04, 2020 -- Moody's Investors Service ("Moody's") assigned first-time ratings to Emergent BioSolutions Inc. ("Emergent") including a Ba2 Corporate Family Rating, a Ba2-PD Probability of Default Rating, a Ba3 senior unsecured rating, and an SGL-1 Speculative Grade Liquidity Rating. The outlook is stable.
Proceeds from the company's new senior unsecured notes issuance will be used to repay outstanding revolver borrowings and for general corporate purposes. The revolver borrowings relate to prior acquisitions made by Emergent.
Ratings assigned: Corporate Family Rating, Ba2
Probability of Default Rating, Ba2-PD
Senior unsecured notes, Ba3 (LGD5)
Speculative Grade Liquidity Rating, SGL-1
Outlook actions: Outlook assigned stable RATINGS RATIONALE
Emergent's Ba2 Corporate Family Rating reflects its niche position developing and manufacturing products that treat public health threats. Areas of focus include public health outbreaks such as the coronavirus pandemic, vaccines for military and civilian use, travel health, and the US opioid epidemic. Moody's anticipates steady ongoing growth in Emergent's anthrax and smallpox vaccines supplied to the US Strategic National Stockpile. A plethora of recent coronavirus vaccine manufacturing contracts signed with companies like Johnson & Johnson and AstraZeneca PLC, as well as the US government itself, will bolster Emergent's contract development and manufacturing organization (CDMO) business.
With Emergent's niche focus comes modest scale compared to global pharmaceutical companies, with somewhat limited diversity at the product and customer level. Contracting with the US government subjects Emergent to compliance with numerous laws and regulations, and cash flow volatility associated with ordering patterns. There is also risk that changes in the government's strategic priorities or budgetary constraints reduce demand for Emergent's products. Further, while the coronavirus pandemic will significantly boost Emergent's CDMO business over the next several years, there is uncertainty around the longer-term sustainability of revenue in that business. Moody's anticipates that Emergent will sustain modest financial leverage, with debt/EBITDA in the range of 2.5x-3.5x.
ESG considerations are material to Emergent's rating. Social risks include maintaining favorable customer relations with the US government, which is Emergent's largest customer. Demand from the US government for Emergent's key products is subject to prioritization of public health needs and budgetary considerations, which can change over time. As a key supplier to the US government's Strategic National Stockpile, Emergent is also subject to numerous laws and contractual requirements. Social risks also include responsible production, including timely supply and delivery to the US government, and compliance with manufacturing compliance standards. Moody's regards the coronavirus pandemic as a social risk under our ESG framework, given the substantial implications for public health and safety. Emergent faces substantial social opportunities related to the pandemic because of multiple contracts with coronavirus vaccine manufacturers and the US government to produce vaccines in its facilities. These contracts will produce substantial revenues for Emergent over the next several years, and boost the status of its CDMO business.
Among governance considerations, Emergent's financial policies have included an appetite for debt-financed acquisitions, which Moody's expects will continue. However, the company's publicly articulated net debt/EBITDA target of 2.0x to 3.0x reflects a policy of generally moderate financial leverage, although this range could be exceeded for debt-funded acquisitions.
The Ba3 rating on the senior unsecured notes reflects the presence of secured debt in Emergent's capital structure in the form of a $430 million term loan and a $600 million revolving credit facility. The revolver is expected to be undrawn following the senior notes issuance.
The SGL-1 Speculative Grade Liquidity Rating reflects Moody's expectation that Emergent will maintain very good liquidity based on positive free cash flow, availability under the $600 million revolving credit agreement expiring in 2023, and good cushion under financial maintenance covenants in the term loan and revolver. These include net debt/EBITDA of below 3.75x stepping down to 3.5x starting in 4Q2020, and interest coverage (EBITDA less maintenance capex divided by interest cost and principal payments) of greater than 2.5x.
The outlook is stable, reflecting Moody's expectations for steady growth in the product portfolio and successful execution of various COVID-19 related supply contracts.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
Factors that could lead to an upgrade include increased scale and diversity, successful fulfillment of COVID-19 vaccine commitments, and growth in the CDMO business beyond COVID-19 contracts. Quantitatively, debt/EBITDA sustained below 2.5x would support an upgrade.
Conversely, factors that could lead to a downgrade include a termination of anthrax or smallpox vaccine contracts with the US government, setbacks in COVID-19 vaccine production, or manufacturing compliance deficiencies. Quantitatively, debt/EBITDA sustained above 3.5x could result in a downgrade.
Headquartered in Gaithersburg, Maryland, Emergent BioSolutions Inc. is a life sciences company that provides pharmaceuticals, vaccines, medical devices and contract manufacturing services related to public health threats affecting civilian and military populations. Revenues for the 12 months ended June 30, 2020 totaled approximately $1.3 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.
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.
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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.
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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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