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Therakos Inc. 'B' Corporate Credit Rating Affirmed On Increased Term Loan, Outlook Stable; Debt Ratings Affirmed

    • Therakos Inc. is increasing its first-lien term loan by $46.5 million and its second-lien term loan by $25 million to finance a distribution to its shareholders.
    • The increase in debt raises pro forma debt leverage to 5.8x, from approximately 4.5x, for the (annualized) quarter ended Sept. 30, 2013.
    • We are affirming all ratings on the company, including our 'B' corporate credit rating, 'B' issue-level and '3' recovery rating on the company's $275 million of first-lien debt, and 'CCC+' issue level and '6' recovery rating on the $105 million of second-lien debt.
    • The stable outlook reflects our expectation that, despite increasing EBITDA, adjusted debt leverage will remain above 5.0x over the next couple of years.
    NEW YORK (Standard & Poor's) Dec. 5, 2013--Standard & Poor's Ratings Services 
    said today it affirmed its 'B' corporate credit rating on West Chester, 
    Pa.-based Therakos Inc. The outlook is stable. At the same time, we affirmed 
    our 'B' issue-level rating and '3' recovery rating on the company's $275 
    million of first-lien debt, which includes an undrawn $35 million revolving 
    credit facility, and 'CCC+' issue level rating and '6' recovery rating on the 
    $105 million of second-lien debt.   
    "Our rating on Therakos reflects a "weak" business profile and "highly 
    leveraged" financial risk profile. Our business risk assessment incorporates 
    the risks of Therakos' small size, limited addressable market, and heavy 
    reliance on one therapy--extracorporeal electrophoresis (ECP)--for all of its 
    revenues," said credit analyst Cheryl Richer. "These weaknesses are only 
    partially offset by the company's leading position within its niche market, 
    strong geographic and customer diversity, sturdy barriers to entry, and 
    competitive advantage arising from the strong safety and efficacy profile of 
    Therakos' ECP therapy. Founded in 1986, Therakos was carved out of 
    Orthoclinical Diagnostic, a division of Johnson & Johnson, in late 2012 as an 
    independent operation owned by The Gores Group."
    Our stable rating outlook on Therakos reflects our expectation that modest 
    revenue growth and some EBITDA margin erosion will result in debt to EBITDA 
    above 5.0x over the next 12 months. 
    Downside scenario 
    We could lower the rating in the unlikely event that revenue decline and 
    margin contraction are high enough to result in negative free cash flow, which 
    could constrain liquidity. This would require a double-digit revenue decline 
    and an EBITDA margin contraction of at least 600 bps. Such a scenario could 
    follow a launch of a competitive product, and/or substantially 
    higher-than-expected clinical trial expenses.
    Upside scenario 
    While unlikely, we could raise our corporate credit rating on Therakos if it 
    sustains a debt-to-EBITDA ratio of about 4.5x and FFO-to-debt ratio above 12%. 
    We estimate this would require double-digit revenue growth and an EBITDA 
    margin expansion of 300 bps from our 2014 base case projections. Our belief 
    that the financial sponsor is committed to such a financial policy would be a 
    prerequisite for an upgrade, and, given recent dividend recapitalization, we 
    view this scenario as unlikely.
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