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ICON Plc -- Moody's places ICON's rating under review for downgrade

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Rating Action: Moody's places ICON's rating under review for downgradeGlobal Credit Research - 26 Feb 2021Paris, February 26, 2021 -- Moody's Investors Service ("Moody's") has today placed ICON Plc's ("ICON" or "the company") Baa3 long-term issuer rating under review for downgrade. The outlook has been changed to rating under review from stable.RATINGS RATIONALEToday's rating action follows the company's announcement[1] on 24 February that it has entered into a definitive agreement to acquire PRA Health Sciences, Inc. (PRA) in a cash and stock transaction valued at approximately USD12 billion, to create a global leading healthcare and clinical contract research organization (CRO). The transaction has been approved by the Boards of Directors from both companies and is anticipated to close during the third quarter of 2021, subject to regulatory and shareholder approvals and customary closing conditions. Moody's understands that debt funding will be around USD6 billion.In Moody's view, the announced acquisition will materially change ICON's capital structure and significantly increase Moody's adjusted gross leverage above the 2.5x rating guidance for negative rating action. Based on initial calculations, the partially debt-funded transaction could increase Moody's adjusted gross debt to around 5x to 5.5x on a proforma basis on closing of the transaction. The acquisition will also add significant execution risk around the integration of PRA, given the scale of both companies. Moody's had expected some M&A activity and this was incorporated into the Baa3 rating level, but this transaction indicates a more aggressive financial policy than previously expected by the rating agency.This said, the combination would create the second largest global CRO by revenue with potentially material cost and revenue synergies, broadening ICON's service and geographic offering, especially towards data and hybrid trial solutions, and strengthening relationships with the top leading biopharmaceutical companies.If the transaction is approved by relevant stakeholders, and if the capital structure is in line with Moody's initial expectations, it is highly likely that negative rating action may not be limited to one rating notch.Moody's will consider a number of factors to complete its review, including but not limited to the company's: (i) combined future capital structure, including the proportion of the transaction that will be debt-funded, (ii) financial policy, including leverage targets and dividend/share buy-backs, and (iii) business plan of the combined group, including potential synergies and execution and integration risks mitigants.FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGSBecause of the rating under review for a downgrade, an upgrade is unlike in the near term, upward pressure could arise if, (1) the company commits to maintain a leverage (Moody's-adjusted gross debt/EBITDA) below 1.5x on a sustained basis; (2) the company's Moody's-adjusted EBITDA margin trends in excess of 20% on a sustained basis; and (3) ICON improves its business diversification and scale.Conversely, downward pressure could develop if (1) there is a visible shift towards a more aggressive financial policy, as illustrated by Moody's-adjusted debt/EBITDA above 2.5x on a sustained basis; (2) Moody's-adjusted EBITDA margin trends below 15% sustainably; or (3) there is a material deterioration in the business prospects for or market conditions of the CRO industry.PRINCIPAL METHODOLOGYThe 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.COMPANY PROFILEICON Plc is a globally operating CRO. The company provides outsourced development services to the pharmaceutical, biotechnology and medical device industries. The company specialises in the strategic development, management and analysis of programmes that support clinical development, from compound selection to Phase 1-4 clinical studies. Founded in 1990 in Ireland, the company operates from 93 locations in 41 countries and has around 16,000 employees. For the year 2020, the company generated USD2.8 billion in revenue with a reported operating profit of USD410 million. PRA generated USD3.2 billion in revenue and reported income from operations of USD328 million over 2020.REGULATORY DISCLOSURESFor 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.At least one ESG consideration was material to the credit rating action(s) announced and described above.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.REFERENCES/CITATIONS[1] ICON's press release "ICON to Acquire PRA Health Sciences, Creating a World Leader in Healthcare Intelligence and Clinical Research" 24-Feb-2021Please 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. 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