Fitch Affirms RP Select Finance Trust's Ratings at 'BBB'; Outlook Stable
KEY RATING DRIVERS
RP Select Finance Trust's ratings reflect the following:
--RP Select FT's royalty stream requires minimal operational expenses which generates EBITDA margins exceeding 99% annually. Fitch believes these high margins will remain durable during the life of the trust.
--Fitch expects continued leverage reduction, as RPSFT pays down debt in the face of moderating EBITDA due to a maturing royalty stream. Debt leverage decreased to 1.1 times (x) at the end of 2014 from 2.0x in the prior year. Mandatory bank loan prepayments with relatively flat EBITDA drove the improvement.
--Pharmaceutical patents/contracts expiring over the next three years account for more than 55% of RP Select FT's royalty revenues. Revenues will continue to decline, as RPSFT's credit agreement prohibits it from acquiring new royalty interests to supplant the expiring assets.
Excess Cash Flow Reducing Debt:
RPSFT will likely pay down its remaining borrowings in 2015-2016, driven by the excess free cash flow (FCF) recapture and the scheduled amortization payments. Leverage (total debt/EBITDA) fell to 1.1x in 2014 from 2.0x in 2013, accelerated by a mandatory prepayment provision in RP Select FT's $850 million secured term loan agreement. The combination of scheduled debt amortization and prepayment from excess cash flow led to a decrease in the debt of $194.5 million in 2014.
High Operating Leverage:
Fitch forecasts operating costs to remain low, resulting in sustained high EBITDA margin (above 99%) through the ratings horizon. RP Select FT's low operating expenses provides for significant EBITDA generation, resulting in EBITDA margins of 99% in 2014 and 2013. Operating costs are limited to management expenses, and trustee and financing fees. The company incurs no expenses for locating new revenue sources, as an investment event in August 2011 bars the company from sharing in any new assets from the beginning of 2012.
Strong FCF, Despite Distributions:
Fitch projects sustained strong FCF exceeding 70% of royalty revenues until final repayment of outstanding term loan borrowings in 2016. The assumption includes RP Select FT's annual special distributions to unit holders of 20% of EBITDA through 2015 or until it repays the term loan. Fitch believes RP Select FT will then pay the vast majority of operating cash flow to unit holders.
Expected FCF Exceeds Debt:
RP Select FT's cumulative CFO generation in 2015 to 2016 should exceed outstanding debt obligations under its secured credit facility. RP Select FT shares in a portfolio of more than 10 significant royalty-bearing interests with RPI Finance Trust. RP Select FT receives 20% and RPI Finance Trust gets 80% of cash flows derived from the asset portfolio. Fitch calculates cumulative royalties from RP Select FT's share in 2015-2016 of greater than $500 million that easily covers the $254 million of outstanding term loans at the end of 2014.
Fitch's key assumptions within the rating case for RP Select FT include:
--A declining royalty stream in 2015 through 2017, due to expiring assets.
--EBITDA margin maintain around 99%.
--Dividends at 20% of EBITDA until all debt is repaid - then at 95% of EBITDA.
--Debt declining to zero in 2015-2016 from scheduled pay-downs and cash flow recapture.
--Leverage declining to or near zero in 2015-2016.
Fitch does not anticipate an upgrade despite the potential for significant deleveraging in the near term. The eventual wind-down of revenues as well as the possibility of a more aggressive dividend policy once the debt is repaid hinders upward migration of the rating.
A negative rating action is unlikely given the expected significant declines in debt and leverage. However, a significant fall in the value of the royalty asset portfolio such that it is no longer commensurate with the debt maturity schedule would pressure the rating.
Strong FCF Provides Liquidity:
RP Select FT's liquidity remains adequate, as cash flow generation is robust with FCF margin exceeding 70% including cash distributions to unit holders. Fitch projects FCF margins remaining above 70% until RPSFT repays the term loan, even though 20% of EBITDA may be dedicated to unit holder distributions. Fitch expects the vast majority of EBITDA will be distributed to unit holders and consequently a significant reduction in FCF and FCF margin, once the term loan facility is paid down in 2016 (or 2015).
Debt Run Off Anticipated:
Fitch sees leverage (total debt to EBITDA) continuing to decrease over the ratings horizon driven by an excess cash flow recapture requirement in RP Select FT's secured credit facilities. Debt reduction will exceed moderating EBITDA, leading to leverage significantly below 1.0x at the end of 2015, before the term loan is fully paid in 2016 (or 2015).
FULL LIST OF RATING ACTIONS
Fitch affirms the following ratings:
RP Select Finance Trust
--Issuer Default Rating (IDR) at 'BBB';
--Senior secured bank loan rating at 'BBB'.
The Rating Outlook is Stable.