Research: Rating Action: Moody’s Downgrades Akorn to Caa2; revises outlook from positive to stable

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New York, September 15, 2022 — Moody’s Investors Service (“Moody’s”) has downgraded Akorn Operating Company LLC’s (“Akorn”) ratings, including Corporate Family rating from Caa2 to Caa1, Probability of Default rating to Caa2-PD from Caa1-PD, and the senior secured term loan to Caa3 from Caa2. The outlook has been revised from positive to stable.

The ratings downgrade reflects Akorn’s significant reduction in scale and diversity following the divestments of the over-the-counter consumer healthcare segment and branded pharmaceuticals segments, as well as the closure of the Akorn’s manufacturing facility in Somerset, New Jersey. The sale of the most profitable business segments significantly reduced the company’s profits and its ability to maintain self-sustaining operations. Additionally, the company is unlikely to remain in compliance with the term loan’s full leverage commitment after the covenant relief expires at the end of 2022. Moody’s expects that the company seeks to sell the remaining generic specialty pharmaceutical businesses, with the proceeds being used to repay outstanding debt in its capital structure. Moody’s believes there is a growing likelihood of a struggling exchange if the sale of the remaining assets does not materialize.

Downgrades:

..Issuer: Akorn Operating Company LLC

…. Corporate family ranking, downgraded to Caa2 from Caa1

…. Default scoring probability, downgraded to Caa2-PD from Caa1-PD

….Senior secured term loan, downgraded to Caa3 (LGD5) from Caa2 (LGD4)

Outlook Actions:

..Issuer: Akorn Operating Company LLC

….Outlook, changed to stable from positive

RATINGS RATIONALE

The Caa2 family of companies’ rating reflects Akorn’s modest size with revenues declining to less than $400 million and a focus on the US generic drug market. The rating is further constrained by Akorn’s very high Moody’s-adjusted pro forma leverage, above 10.0x as of June 30, 2022, despite term loan repayments using proceeds from recent asset disposals. The credit agreement was amended to provide covenant relief from the second quarter of 2022 to the fourth quarter of 2022, indicative of the expected decline in near-term earnings.

The rating benefits from the company’s significant cash balance with $93 million in liquid assets, of which approximately $34 million is earmarked solely for the repayment of debt or the financing of investments or growth initiatives. The company also benefits from high barriers to entry by focusing on niche products in alternative dosage form.

The stable outlook reflects Moody’s expectation that Akorn will continue to operate with modest scale and very high leverage.

Akorn’s liquidity is adequate with a cash balance of $93 million as of June 30, 2022, including approximately $34 million of restricted cash. Moody’s expects Akorn to break even in free cash flow in 2022. Akorn has an asset-based revolver of $160 million due October 2025, of which $58 million has been drawn down at June 30, 2022. The size of the facility is limited by a borrowing base which is based on accounts receivable and inventory balances. Akorn’s term loan has no mandatory debt amortization. The company received a clause suspension from the second quarter of 2022 to the fourth quarter of 2022 on its maximum total leverage ratio clause. Moody’s does not expect the company to meet its revolver commitment, should it be tested beginning in the first quarter of 2023. Other sources of cash are limited given that nearly all of Akorn’s assets are pledged as security for his guaranteed term loan and his revolver.

ESG considerations have a very negative credit impact (CIS-4) on Akorn. The company has a neutral to low credit exposure to environmental considerations (E-2). Akorn has very strongly negative credit exposures to social considerations which carry high credit risks (S-5). These include industry-wide exposures related to political and regulatory risks, and high manufacturing compliance standards. The company’s history of regulatory issues related to manufacturing violations at two sites resulted in resolution by Akorn and reassessment by the FDA. During the last quarter, Akorn made the strategic decision to close its plant in Somerset, NJ. Akorn faces very negative governance risk exposures (G-4). The score reflects aggressive financial policies, as Akorn operates with high financial leverage. Akorn’s weak track record in risk management is partly reflected in the company’s 2020 bankruptcy filing.

FACTORS THAT MAY LEAD TO IMPROVEMENT OR DEGRADATION OF RATINGS

Factors that could lead to an upgrade include improved earnings growth and improved liquidity through cash flow generation.

Factors that could lead to a downgrade include weakening liquidity primarily due to weaker cash flow. Failure to demonstrate sustainable earnings growth or transactions that increase the likelihood of default could also result in downgrade.

Akorn Operating Company LLC, headquartered in Lake Forest, Illinois, is a manufacturer of specialty generic pharmaceutical products. The Company focuses on generic drugs in alternative dosage forms such as ophthalmic drugs, injectable drugs and others in liquid, semi-solid, topical and nasal spray dosage forms. Revenue for the twelve months ended June 30, 2022 was approximately $432 million.

The main methodology used in these ratings is Pharmaceuticals published in November 2021 and available at https://ratings.moodys.com/api/rmc-documents/356413. Otherwise, please see the Scoring Methodologies page on https://ratings.moodys.com for a copy of this methodology.

REGULATORY INFORMATION

For details on key rating assumptions and Moody’s sensitivity analysis, see the Methodological Assumptions and Sensitivity to Assumptions sections in the Disclosure Form. Moody’s rating symbols and definitions can be found at https://ratings.moodys.com/rating-definitions.

For ratings issued on a program, series, category/class of debt or security, this announcement provides certain regulatory information regarding each rating of a subsequently issued bond or note of the same series, category/class of debt, security or under a program for which ratings are derived exclusively from existing ratings in accordance with Moody’s rating practices. For ratings issued on a media provider, this announcement provides certain regulatory information relating to the credit rating action on the media provider and each particular credit rating action for securities whose credit ratings are derived from the support provider’s credit rating. For the provisional ratings, this press release provides certain regulatory information relating to the provisional rating assigned, and to a final rating that may be assigned after the final issuance of the debt, in each case where the structure and conditions of the transaction n have not changed prior to the final rating being assigned in a way that would have affected the rating. For more information, please see the issuer/transaction page of the respective issuer at https://ratings.moodys.com.

For all relevant securities or rated entities receiving direct credit support from the lead entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action , the associated regulatory information will be that of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to the jurisdiction: Ancillary services, Disclosures to the rated entity, Disclosures to be provided by the rated entity.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued without modification as a result of such disclosure.

These notes are solicited. Please refer to Moody’s Policy for the Designation and Assignment of Unsolicited Credit Ratings available on its website. https://ratings.moodys.com.

The regulatory information contained in this press release applies to the credit rating and, if applicable, the outlook or rating revision relating thereto.

Moody’s general principles for assessing environmental, social and governance (ESG) risks in our credit analysis are available at https://ratings.moodys.com/documents/PBC_1288235.

The worldwide credit rating on this credit rating announcement was issued by one of Moody’s affiliates outside the EU and is approved by Moody’s Deutschland GmbH, An der Welle 5, Frankfurt am Main. -le-Main 60322, Germany, in accordance with Article 4(3) of Regulation (EC) No 1060/2009 on credit rating agencies. Further information on the EU approval status and the Moody’s office that issued the credit rating can be found at https://ratings.moodys.com.

The worldwide credit rating on this credit rating announcement has been issued by one of Moody’s affiliates outside the UK and is approved by Moody’s Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the United Kingdom. . Further information on the UK endorsement status and the Moody’s office that issued the credit rating can be found at https://ratings.moodys.com.

Please see https://ratings.moodys.com for any updates on changes to the lead rating analyst and Moody’s legal entity that issued the rating.

Please see the issuer/transaction page at https://ratings.moodys.com for additional regulatory information for each credit rating.

Vladimir M. Ronin, CFA
Vice President – Senior Analyst
Corporate Finance Group
Moody’s Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
UNITED STATES
JOURNALISTS: 1 212 553 0376
Customer service: 1 212 553 1653

Ola Hannoun-Costa
Associate General Manager
Corporate Finance Group
JOURNALISTS: 1 212 553 0376
Customer service: 1 212 553 1653

Release Office:
Moody’s Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
UNITED STATES
JOURNALISTS: 1 212 553 0376
Customer service: 1 212 553 1653

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