June 10 (SeeNews) - Moody's Investors Service said on Wednesday that it has affirmed the Ba3 corporate family rating (CFR) and B1-PD probability of default rating (PDR) of Dutch-registered Huvepharma International, owned by Bulgarian investor Kiril Domuschiev.
In addition, Moody's revised Huvepharma International's outlook to positive from stable over the company's expected robust and profitable growth and lower investment spending, it said in a statement.
Moody's also said in its statement:
"RATINGS RATIONALE
The change of outlook to positive from stable reflects Moody's expectation that Huvepharma's credit metrics will improve over the next 12-18 months thanks to strong operating and financial performance and the upcoming completion of its large investment programme. The rating action also reflects the company's continuing and profitable growth and a significant increase in scale over the recent years. In addition, favourable industry fundamentals support the company's credit quality.
Huvepharma substantially increased its size over the last four years, with revenue growing by 84% to €548 million in 2019 from €297 in 2015, mainly through organic expansion. Moody's expects annual double-digit growth in percentage terms to persist in 2020-21, with revenue reaching around €700 million in 2021. At the same time, the company's profitability is solid, with Moody's adjusted EBITDA margin being well above 20% in 2018-19. The EBITDA margin should be at around 25% over the next two years thanks to the growing economy of scale and the launch of a new fermentation facility in 2019, which will strengthen vertical integration.
Moody's expects Huvepharma's leverage, measured as Moody's adjusted debt/EBITDA, will decrease to 3.0x-3.5x in 2020 and below 3.0x in 2021 from 4.0x in 2019 due to a growth in earnings and gradual repayment of debt, supported by improving free cash flow (FCF). In 2018-19, the company executed a large investment programme of around €305 million, spending €70 million on three small bolt-on acquisition in France and the US, €70 million on product development, €30 million on maintenance and €135 million on capacity expansion, including the fermentation facility, which was launched in 2019, and a new vaccine plant, which start-up is scheduled for 2021. Because capital spending will subside to €80 million in 2020 and €60 million in 2021, Huvepharma's FCF will rise materially over the next two years from flat to negative in 2018-19.
The rating action also factors in favourable industry fundamentals which support long term revenue growth. Global population growth and the rising consumption of animal-based protein support the global animal health industry. In addition, the global food supply chain continues to increase efficiency, and animal health products will play a role in productivity increases.
Huvepharma's credit quality is supported by the company's (1) low cost vertically integrated business model; (2) strong positions in key niche segments; (3) balanced geographical and product diversification; (4) continuing product development; and (5) proven ability to rapidly expand its operations while preserving its high profit margin, primarily through organic growth of the existing product portfolio and new launches.
However, the rating also factors in Huvepharma's (1) small size, compared with its peers; (2) lack of diversification into the companion animal segment; (3) large debt maturities of around €350 million in Q3 2022; and (4) concentrated ownership structure.
The B1-PD PDR reflects a higher-than-average family recovery rate (65%), given the presence of an all-bank debt capital structure.
ENVIRONMENTAL, SOCIAL AND GOVERNANCE (ESG) CONSIDERATIONS
The rapid and widening spread of the coronavirus outbreak, deteriorating global economic outlook, falling oil prices, and asset price declines are creating a severe and extensive credit shock across many sectors, regions and markets. The combined credit effects of these developments are unprecedented. We regard the coronavirus outbreak as a social risk under our ESG framework, given the substantial implications for public health and safety.
The animal health sector has been so far only marginally affected by the shock, given its correlation to the non-discretionary and essential food consumption. Huvepharma has not had any material operational disruptions thanks to its vertical integration. On the contrary, the company has had an increased demand for its products because of some operational disruption in the global supply of active pharmaceuticals ingredients (API). The lack of a companion animal business is also supportive in this environment because of its greater susceptibility to changes in consumer demand amid the pandemic.
Beyond the outbreak, regulatory changes will continue to represent environmental and social risks for Huvepharma. Outside the US and Europe, many developing countries do not have any significant regulations curbing the use of antibiotics in livestock and may over time, pursue regulatory actions. Consumer preferences are gradually shifting away from proteins produced with the use of antibiotics, which will be a long-term headwind. Moody's believes that this will be partially offset by growth in products that are used as alternatives to antibiotics in protein production. In addition, as other public rivals are making their antibiotics business less of a priority, Huvepharma would be able to increase its share in a shrinking market.
Governance considerations include Huvepharma's concentrated private ownership structure, because the company is ultimately controlled by the Domuschiev family, which creates a risk of rapid changes in the company's strategy, financial policies and development plans. However, the owners' historically conservative financial policy towards Huvepharma partly mitigate the company's exposure to excessive shareholder distributions. In addition, dividend payments will likely remain at moderate levels over the next few years, according to the company.
RATIONALE FOR THE POSITIVE OUTLOOK
The positive outlook reflects Moody's expectation that the company will sustain its robust and profitable growth and scale down investment spending, resulting in sizeable positive FCF; gradually reduce its debt; pursue a balanced financial policy; and decrease debt/EBITDA below 3.0x over the next 18 months.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
Moody's could upgrade Huvepharma's rating if the company were to (1) continue to increase its scale and demonstrate robust operational performance; (2) reduce its adjusted gross debt/EBITDA below 3.0x on a sustainable basis while maintaining retained cash flow/net debt above 20%; and (3) maintain a strong liquidity profile and positive post-dividend FCF.
Moody's could stabilise the outlook if the company fails to achieve the targets for an upgrade above over the next 12-18 months.
Moody's could downgrade the rating in the event of (1) a material deterioration in the company's competitive position within its core product lines; (2) a negative impact on its operating performance owing to increasing regulatory risks; (3) aggressive debt financed M&A deals or shareholder distributions; or (4) other related developments that could weaken its liquidity position, or increase its leverage, with adjusted gross debt/EBITDA trending towards 4.5x and retained cash flow/net debt trending towards the low teens in percentage terms on a sustained basis."