Rating Action: Moody's assigns first time B3 CFR to Specialty Pharma III; Outlook stableGlobal Credit Research - 09 Feb 2021New York, February 09, 2021 -- Moody's Investors Service ("Moody's") assigned ratings to Specialty Pharma III Inc. (doing business as Wedgewood Pharmacy) including a B3 Corporate Family Rating, B3-PD Probability of Default Rating, and a B3 rating to the senior secured first lien credit facilities. The outlook is stable.Proceeds from the $220 million first lien term loan will be used, along with equity, to finance the recapitalization of Wedgewood Pharmacy by Partners Group. The remaining stake will be owned by the company's management and other shareholders.Ratings assigned:Issuer: Specialty Pharma III Inc.Corporate Family Rating, assigned B3Probability of Default Rating, assigned B3-PDSenior secured first lien term loan, assigned B3 (LGD4)Senior secured first lien revolving credit facility, assigned B3 (LGD4) Outlook action: Assigned, stable outlook RATINGS RATIONALE Wedgewood Pharmacy's B3 CFR is constrained by its small size with less than $200 million in revenue and its very high financial leverage. Moody's estimates pro forma debt/EBITDA is over 7.0x. The ratings are also constrained by the company's event and financial policy risks related to its private equity ownership. The ratings are supported by Wedgewood's leading market position in the animal health drug compounding industry and from favorable long term trends in the pet care sector. Moody's believes business risk is lower in pet health than in many other human healthcare sectors. While the earnings growth outlook for Wedgewood is strong, many companies face operational risks and management challenges during periods of rapid growth.Moody's expects that Wedgewood's liquidity will be very good, supported by positive free cash flow and an undrawn $40 million revolver that expires in 2026. Wedgewood has modest capex at around $5-7 million and mandatory debt amortization at 1% per year, or $2.2 million. Furthermore, Wedgewood's proposed first lien term loan is expected to have no financial maintenance covenants while the proposed revolving credit facility will contain a springing maximum first lien net leverage ratio that will be tested when the revolver is more than 35% drawn. The first lien credit facility contains incremental capacity up to the greater of $40m and 100% of adjusted EBITDA, plus unused amounts under the general debt basket, plus uncapped amounts so long as (i) first lien net leverage ratio = 5.75x (if pari passu), (ii) either secured net leverage ratio = 6.00x or interest coverage ratio > 2.00x (if junior secured), and (iii) either total net leverage ratio = 6.50x or interest coverage ratio > 2.00x (if unsecured or secured by non-collateral). Alternatively, such ratio tests may be satisfied so long as the ratios are no worse on a pro forma basis. Amounts up to the greater of closing date EBITDA and 100% of adjusted EBITDA may be incurred with an earlier maturity date than the initial term loans. There are leverage-based step-downs in the asset sale prepayment requirement from 100% to 50% and 0% upon achieving a first lien net leverage ratio of 5.25x and 4.75x, respectively. The credit agreement permits the transfer of assets to unrestricted subsidiaries, with no additional "blocker" protections and will be guaranteed by holdings ("Specialty Pharma II"), the borrower, and each existing and subsequently acquired wholly-owned material US subsidiary, raising the risk that subsidiary guarantees may be released following a partial change in ownership of such subsidiaries.ESG considerations are material to Wedgewood's ratings. Social risks include stringent FDA compliance requirements, notably operating a 503B outsourcing facility. Another risk includes proposed changes by the FDA on bulk compounding that if enacted, could limit or reduce future volumes of product sold to vets for office use that could strain profits for Wedgewood. Governance risks include Wedgewood's private equity ownership and high financial leverage.The stable outlook reflects Moody's view that Wedgewood's scale and earnings will grow, but that debt/EBITDA will remain high.FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGSFactors that could lead to a downgrade include if operational performance deteriorates or liquidity weakens, or the company fails to generate positive free cash flow. Regulatory changes impacting the animal health drug compounding sector could also put downward pressure on the company's ratings.Wedgewood's ratings could be upgraded if it sustains earnings growth leading to a meaningful increase in scale. The sustainability and success in ramping up its 503B facility and if Wedgewood's debt/EBITDA is sustained below 6.0x could also put upward pressure on the company's ratings.Headquartered in Swedesboro, New Jersey, Specialty Pharma III Inc. (doing business as Wedgewood Pharmacy) is an animal health drug compounding pharmacy that provides specially prepared medicines to meet the individual needs of pets. Reported revenue for the twelve months ended Sepetmber 30, 2020 were less than $200 million.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.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. 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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 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. Morris Borenstein VP - Senior Credit Officer Corporate Finance Group Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. 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