Fitch Ratings has affirmed
Fitch has also affirmed ELAN's senior unsecured notes at 'BB'/'RR4'. Additionally, Fitch has assigned a 'BBB-'/'RR1' rating to the 2029 incremental term loans co-issued by
The rating actions reflect the operating headwinds facing the company, though Fitch expects the company to still generate positive FCF and deleverage through a combination EBITDA growth and debt reduction.
Key Rating Drivers
Operating Environment Headwinds: Supply chain disruptions, coronavirus-related shutdowns in
Margin Improvement/Debt Reduction Required: Fitch expects both EBITDA growth and debt reduction to reduce leverage after the
Advancing Pipeline: Elanco's legacy research and development efforts, the Bayer and the Kindred acquisitions have helped to strengthen the company's pipeline. The company recently launched Zorbium, a long-acting transdermal pain product for cats. It has garnered six regulatory approvals so far this year, including Credelio (
Competitive Position in
ELAN is also expected to benefit from durable revenues relative to pharmaceutical companies given its more fragmented and notably private-pay customer base as opposed to public and commercial third-party payers. Fitch views ELAN's scale and portfolio reach as a competitive advantage allowing it to serve a global customer base with its intellectual property and to buffer against the consolidation of its end customers.
Acquisitions Improved Business Profile: The acquisitions of
Derivation Summary
ELAN has a competitive position within the global animal health segment with a large, global footprint and scale that affords it competitive advantages relating to procurement, manufacturing, R&D, distribution and to buffer against the effects of customer consolidation. Compared to pharmaceutical peers that focus on humans, ELAN's portfolio benefits from no reimbursement risk. However, its antibiotic segment continues to face material headwinds from regulatory interventions and end-consumer preferences. ELAN's closest peer is
Parent-Subsidiary Linkage
The approach taken is a weak parent (
Key Assumptions
Fitch's Key Assumptions Within Our Rating Case for the Issuer
Revenues decline 5% to 8% in 2022 owing to supply-chain disruptions and pandemic-related headwinds, followed by mid-single-digit growth.
Operating EBITDA margins gradually improve during the forecast period assuming ELAN will realize
Leverage declines well below 4.5x by YE 2023 through EBITDA expansion and debt reduction.
The issuer does not initiate a dividend nor engage in material M&A until it achieves its deleveraging target.
FCF generation of at least
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
Successful execution of growth and productivity initiatives manifesting in revenues and margins consistent with management's forecast;
Fitch's expectation of gross leverage (gross debt to operating EBITDA) sustaining below 3.5x;
Fitch's expectation of FCF to gross debt sustaining above 10%;
Continued improvements in ELAN's scale and relative competitive position.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
Fitch's expectation of gross leverage sustaining above 4.5x due, in part, to weaker or slower recovery in EBITDA or synergy realization without additional debt repayment;
Continued erosion in antibiotic demand without sufficient offsets.
Best/Worst Case Rating Scenario
International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from '
Liquidity and Debt Structure
Principally Secured Capital Structure: ELAN is principally a secured debt borrower with a
Adequate Liquidity: Fitch expects ELAN will have adequate liquidity to manage through the current operating headwinds and upcoming debt maturities. At
Debt Notching: Fitch does not employ a waterfall recovery analysis for issuers rated in the 'BB' category. The further up the speculative-grade continuum a rating moves, the more compressed the notching between the specific classes of issuances becomes. As such, Fitch rates the senior secured credit facility 'BBB-'/'RR1', two notches above the IDR. This rating illustrates Fitch's expectation for superior recovery prospects in the event of default given there is no structurally senior debt (e.g. an ABL) and leverage is not considered to be excessive.
The notching of ELAN's senior unsecured debt is rated 'BB'/'RR4'. The +0 notching from the IDR reflected the potential for being subordinated to secured debt and, thus, the secured debt issuances did not further subordinate the unsecured notes but instead was a realization of the assumption implicit in the original notching. Adequate Liquidity: Fitch expects ELAN will have adequate liquidity to manage through the current operating headwinds and upcoming debt maturities.
Issuer Profile
Elanco is the fourth largest animal health company, and it has one of the broadest portfolios of pet parasiticides in the companion animal sector. Elanco controls a diverse portfolio of more than 200 brands that make it a partner to veterinarians and food animal producers in more than 90 countries.
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG Considerations
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg
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