TPG portfolio company Par Pharma ups debt, draws downgrade

Par Pharmaceutical is funding the $490 million deal with $110 million of equity along with $395 million of additional debt, resulting in adjusted leverage of 5.6x, up from 5.1x, S&P analysts Michael Berrian and David Peknay said on Jan. 31.

“The downgrade reflects our belief that Par’s leverage will remain above 5x over the longer term, given a likelihood of further acquisitions and that its financial risk profile is more reflective of a ‘highly leveraged’ assessment,” S&P said in a note to clients.

On the plus side, S&P said its outlook for the company’s debt is stable, because EBITDA growth and sustained free cash flow generation may be used for debt reduction and could modestly reduce leverage over the near term. Analysts also said Par’s liquidity remains adequate.

A TPG spokesperson declined to comment.

The downgrade of Par Pharma comes after TPG told the Oregon Investment Council it plans to raise a bridge fund of up to $2 billion to fund deals until it raises a new $10 billion flagship fund. Oregon OK’d a $700 million allocation to the bridge fund, according to a report. The money will be folded into TPG’s next buyout fund, which is expected to launch in the fourth quarter of this year.

Last summer, TPG, which was founded by David Bonderman and James Coulter, got permission from LPs to extend the investment period of TPG Partners VI by one year to February, 2015. TPG Fund VI drew in more than $19 billion in 2008, but some of TPG’s investments have fallen short of expectations and weighed on the performance of its funds.

Overall, Par Pharma casts a “weak” business profile because the company lacks scale in the competitive generic drug market, S&P said.

“While the company is the fifth-largest competitor in the U.S. generic pharmaceutical market, it holds only a 3 percent market share and is some distance from number four, Actavis Inc,” S&P said. “It also has some product concentration with its top five generic products, accounting for about 40 percent of total revenues at Sept. 30, 2013.”

Par Pharma’s track record of consistently introducing new products, its focus on difficult-to-manufacture generic formulations, and its successful track record of first-to-file patent challenges ”somewhat” mitigate these risks. 

While the addition of JHP Pharma will broaden Par’s capability to produce branded and generic injectable drugs, JHP has a limited presence in the specialty pharmaceutical market and lacks scale, S&P said.

S&P lowered its corporate credit rating on Par Pharma to B from B+; it cut its issue-level ratings on the company’s senior secured debt to ‘B’ and the senior unsecured debt to CCC+. The latter rating is deep into junk territory, and means the firm is currently vulnerable and dependent on favorable business, financial and economic conditions to meet financial commitments, according to the debt research firm’s rating system.

Also on the fundraising front, TPG is looking to raise $2.5 billion for TPG Opportunities Partners III LP.