Covis Pharma‘s ongoing EBITDA reductions have led to weak cash flow since the company’s restructuring in May 2023, Moody’s noted in lowering its rating on the company two notches down to Caa3 before the Christmas holiday. A negative outlook was assigned in expectation of a default and a second restructuring for the company’s outstanding $900 million debt.
Total liquidity was reduced to $34 million, comprising only $19 million in cash as of Sept. 30, after a $25 million cash burn in the third quarter. The company also has an undrawn revolving credit facility of $15 million and a fully utilized AR facility.
The downgrade notes reads as follows:
London, December 22, 2023 — Moody’s Investors Service (Moody’s) has today downgraded the corporate family rating (CFR) of Covis Parent SCA (Covis or the company) to Caa3 from Caa1. Moody’s has also downgraded to Ca from Caa1 the ratings on the currently outstanding $676 million equivalent backed senior secured first lien term loans, split into a euro-denominated term loan and dollar-denominated term loan B, and the $100 million backed senior secured revolving credit facility (RCF). Both these facilities are borrowed by the company’s subsidiary Covis Finco S.a r.l.. In addition Moody’s has downgraded the rating on the $64 million backed senior secured first lien term loan A to B3 from B1, borrowed by Covis Finco S.a r.l., and downgraded the company’s probability of default rating (PDR) to Ca-PD from Caa1-PD. The outlook on both entities has changed to negative from stable.
The rating action and outlook reflects:
• Limited liquidity leading to expectations of a default and further debt restructuring and substantial losses for creditors
• The company’s high working capital outflows and exceptional costs, alongside ongoing EBITDA reductions, leading to very weak cash flows since the company’s restructuring in May 2023
• Ongoing trading challenges in relation to drug withdrawal, generic competition, and competition from new therapies
RATINGS RATIONALE
Despite the significant restructuring of the balance sheet completed in May 2023, Covis has continued to underperform compared to management’s plan and Moody’s expectations, particularly in relation to cash outflows, leading to renewed pressure on its liquidity. Moody’s had expected Covis’ sales and EBITDA to decline year on year mainly as a result of the withdrawal of Makena, and the impact of guideline changes and the acceleration of triple combination therapies on its COPD business.
However, the most significant component of the company’s underperformance relates to its cash flows. In the nine months ended September 2023, Covis reported free cash outflows, before the effects of the restructuring transaction, of $74 million, including working capital outflows of around $50 million, and exceptional items added back to EBITDA of around $39 million. Whilst the company has utilised new accounts receivables (AR) financing to support liquidity, this has now nearly reached its maximum capacity. Working capital and free cash outflows are expected to deteriorate through the rest of the year driven particularly by the payment of customer rebates and discounts and unwinding of related working capital as sales have reduced. The company’s total debt amounts to around $900 million, including its AR facility utilisation, representing around 8.2x Moody’s estimates for 2023 EBITDA (on a Moody’s-adjusted basis), which is likely to exceed the recovery value of the business.
Covis continues to face challenges in relation high drug concentration with reliance on asthma drug Alvesco for over 35% of sales, which is expected to face generic competition in Europe in 2024, and on the company’s limited COPD treatment portfolio, which is in decline due to its substitution by new triple therapies.
LIQUIDITY
The company’s liquidity is weak. As at September 2023 it had total available liquidity of $34 million, comprising cash of $19 million, undrawn revolving credit facilities of $15 million, and minimal capacity for drawing further on its AR facility. It experienced a $25 million cash outflow in the third quarter to September, with cash outflows expected to continue in the final quarter driven largely by adverse working capital movements. Absent restructuring or other mitigating actions it is likely that a liquidity shortfall will arise in early 2024.
STRUCTURAL CONSIDERATIONS
The backed senior secured term loans, split between a USD term loan B and EUR term loan, are rated Ca, reflecting their ranking behind the backed senior secured term loan A, which is effectively a super senior tranche and is rated B3.
OUTLOOK
The negative outlook reflects Moody’s expectations that a further restructuring transaction will occur leading to a default.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
The ratings could be upgraded if debt is substantially reduced as a result of financial restructuring, or if anticipated recoveries exceed current expectations, alongside evidence of a stabilisation of trading performance and cash flows.
The ratings could be downgraded if anticipated recoveries are below current expectations, or if there are further sustained declines in trading and continued high cash outflows.
PRINCIPAL METHODOLOGY
The principal methodology used in these ratings was Pharmaceuticals published in November 2021 and available at https://ratings.moodys.com/rmc-documents/356413. Alternatively, please see the Rating Methodologies page on https://ratings.moodys.com for a copy of this methodology.
CORPORATE PROFILE
Covis, headquartered in Zug (Switzerland) and Luxembourg, markets and distributes a portfolio of patent-protected and mature drugs in the respiratory and critical care areas, with a presence in over 50 countries. Founded in 2011, it was acquired by funds affiliated with Apollo Global Management, Inc. in March 2020. In 2022, Covis reported revenue and EBITDA pre-exceptionals of $429 million and $181 million respectively.
Skylar Chen
Senior Reporter
skylar.chen@levfininsights.com
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