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eResearch Technology, Inc. -- Moody's confirms eResearch Technology's B3 CFR; stable outlook

·16 min read

Rating Action: Moody's confirms eResearch Technology's B3 CFR; stable outlook

Global Credit Research - 05 Jan 2021

New York, January 05, 2021 -- Moody's Investors Service, ("Moody's") confirmed the B3 Corporate Family Rating (CFR) and B3-PD Probability of Default Rating for eResearch Technology, Inc. ("ERT"). Moody's also confirmed the B2 rating of the existing senior secured first lien revolving credit facility, and senior secured first lien term loan, which has been upsized by $750 million. This concludes the review for downgrade initiated on December 11, 2020 following ERT's announcement that it had entered into an agreement to merge with BioClinica, a leading provider of specialized services to the pharmaceutical industry, with a focus on clinical imaging. At the same time, Moody's assigned a B2 rating to ERT's proposed $50 million first lien senior secured delayed draw term loan due 2027. The ratings outlook has been changed to stable from rating under review.

The proceeds from the issuance of the incremental first lien term loan and delayed draw loan, as well as an incremental $150 million second lien term loan and $50 million second lien delayed draw term loan (both unrated), along with an equity contribution and cash on hand, will be used to finance a merger with BioClinica Holding I, LP ("BioClinica"), as well as pay fees and expenses associated with the transaction.

The stable rating outlook reflects Moody's expectations that ERT will successfully integrate BioClinica and generate mid-single digit revenue growth and solid cash flows, supporting the company's ability to reduce high leverage and maintain good liquidity. However, even with expected EBITDA growth, leverage is expected to remain very high due to the company's aggressive financial policies.

Assignments:

..Issuer: eResearch Technology, Inc.

....Senior Secured First Lien Delayed Draw Term Loan, Assigned B2 (LGD3)

Confirmations:

..Issuer: eResearch Technology, Inc.

....Probability of Default Rating, Confirmed at B3-PD

....Corporate Family Rating, Confirmed at B3

....Senior Secured First Lien Revolving Credit Facility, Confirmed at B2 (LGD3)

....Senior Secured First Lien Term Loan, Confirmed at B2 (LGD3)

Outlook Actions:

..Issuer: eResearch Technology, Inc.

....Outlook, Changed To Stable From Rating Under Review

RATINGS RATIONALE

eResearch Technology, Inc.'s ("ERT") B3 Corporate Family Rating reflects its very high financial leverage with pro forma adjusted debt-to-EBITDA above 8.0x. The rating also reflects the elevated financial risk associated with private equity ownership evidenced by aggressively high initial debt levels following the 2020 leveraged buy-out, as well as a track record of growth through debt-funded acquisitions. Social risks for ERT include a data breach event, where intellectual property and other internal types of sensitive records could be subject to legal or reputational issues. The rating is also constrained by the risk that larger better capitalized companies could choose to pursue developing their own electronic clinical outcome assessments. However, the rating is supported by the company's strong market position in the niche electronic based clinical outcome assessment and clinical imaging markets, solid growth prospects driven by favorable industry fundamentals (expansion in ERT's bookings combined with growth in clinical trials), solid EBITDA margins and high revenue visibility provided by contract backlog.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

Moody's could upgrade the ratings if the company delivers sustained revenue and earnings growth with increased stability in profit margins and successful integration of BioClinica. A commitment to conservative financial posture partially evidenced by debt/EBITDA approaching 6.0 times, along with a record of strong positive free cash flows could also support a upgrade.

Moody's could downgrade the ratings if operating performance deteriorates, if the company has challenges integrating BioClinica, or if free cash flow turns negative on a sustained basis. Liquidity deterioration, aggressive financial policies or EBITA-to-interest below 1.0x would also cause a ratings downgrade.

Social and governance considerations are material to ERT's credit profile. The rating reflects negative social risk as a result of the coronavirus outbreak. The company saw meaningful revenue declines largely due to the pandemic, which resulted in delays of a number of expected clinical trials. Nonetheless, Moody's believes that medical research support service providers face generally lower social risks than many other healthcare providers. Additionally, social risks for ERT include a data breach event, where intellectual property and other internal types of sensitive records could be subject to legal or reputational issues. ERT was exposed to a ransomware attack in September 2020, which forced the company to temporarily take its systems offline and engage cybersecurity experts to assist in remediation. This created a meaningful disruption in the company's operations. Moody's believes the company is likely to commit meaningful resources over the next 12 months to further enhance its data security.

Among governance considerations, ERT's financial policies under private equity ownership are aggressive, reflected in high initial debt levels following the 2020 leveraged buy-out followed by the pending acquisition of BioClinica. Moody's expects management's strategy is to continue supplementing organic growth with acquisitions, using debt if other suitable opportunities arise.

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.

Headquartered in Philadelphia, Pennsylvania, ERT is a provider of centralized cardiac safety, respiratory efficacy services, and electronic clinical outcome assessment solutions to biopharmaceutical sponsors and contract research organizations involved in the clinical trials of new drugs. In December 2020, the company announced that it had entered into a definitive agreement to merge with Bioclinica, a leading provider of clinical trial imaging solutions. ERT is owned by private equity firms Nordic Capital and Astorg Partners with Novo (and Cinven, following BioClinica merger) holding a minority stake. ERT generated pro forma revenues of approximately $833 million for the twelve months ended September 30, 2020.

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_1243406.

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.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK 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 Asst Vice President - 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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