Moody’s downgrades to Caa2 outlook negative
Hold the NOVASP 9.625% at mid price of 64.5 or a Z-spread of 1,740 bps
Yesterday, Moody’s downgraded Novasep to Caa2 and assigned a negative outlook. The downgrade follows Novasep’s appointment of Houlihan Lokey to advise the company on financial and strategic alternatives, including one or a combination of: raising capital via debt/equity, refinancing existing debt, repurchasing debt on the open market, divesting assets and pursuing operational improvements. Moody’s explicitly mentioned a potential distressed debt exchange as one option. Moody’s also recognized the weak operating performance as being partly a result of strategic changes in the pharmaceutical industry (consolidation, in-sourcing). However, the agency expects FY 2011 cash burn to be limited and views Novasep’s position in selected niche markets as favourable. In general we agree with Moody’s, yet believe that liquidity could become tight in Q4 of this year when the semi annual coupon is due. At this stage, it appears that Novasep is unable to halt the slide of its EBITDA as evidenced by the extension of two major contracts (one of them with Gilead which accounts for around 10% of its revenues) in which Novasep had to make concessions both with regards to pricing and volumes. On the upside, visibility does improve through the contract extensions. Having said that, we are not sure whether Novasep’s current debt load is sustainable and believe the company is indeed well advised to look for strategic alternatives. One short term fix would be a super senior facility provided by a special situations funds or its sponsor Gilde. However, this would only be a short term solution and not resolve its fundamental issues, including a too high leverage. Hence we believe a more reasonable approach would be an equity injection and/or a debt exchange in which note holders would have to partially write down their engagement. While Gilde has been supportive so far, it is questionable whether it will inject further equity without asking for some concessions from bond holders. In our view, a distressed EV to EBITDA for Novasep should be at around 5x-5.5x (e.g. US peer Cambrex currently trades at around 5.2x) vs.an estimated FY 2010 net leverage of around 7x at FYE 2010. While the yield on its bonds appears tempting, we do not recommend to get engaged at this stage as a risk of a debt write-down and the long term operational challenges remain. Lastly, French restructuring legislation is not debt holder friendly. We keep our “Very High Risk” on the LARA scale.
dotato di BBL 
