Investing.com -- S&P Global Ratings has upgraded the credit rating of Alvogen Pharma US Inc. to ’CCC+’ from ’SD’ (selective default) following the successful completion of a debt restructuring transaction. The restructuring is seen as improving the company’s liquidity and debt maturity profile. The ratings agency also assigned a ’CCC-’ issue-level rating, along with a recovery rating of ’6’, to the new second-lien term loan.

The upgraded ’CCC+’ rating reflects the view that Alvogen is dependent on favorable business conditions, including the successful launch of several new products, to sustain its capital structure. The company’s strategy merges the ability to manufacture complex generic drugs with an aggressive approach to challenging patents of a limited number of branded pharmaceutical products. This is seen as riskier than the strategies of other generic companies, which generally pursue greater product diversification.

The company’s top two products accounted for a large portion of 2024 revenues. There are concerns that steep declines in revenue and EBITDA from these products over the next two years could heavily impact credit measures and ratings if Alvogen fails to replace that revenue with new products.

Alvogen has invested in growing its branded pharmaceuticals business, which offers a more stable source of high-margin revenue growth, but this only represents a small proportion of sales to date. The company plans to launch at least four major products over the next two years. However, the base case scenario is more conservative than the company’s expectations and assumes only one of these four products will launch by 2026.

The new capital structure improves liquidity and the company’s debt maturity profile, but the credit profile is constrained by medium-term maturities and rapidly accruing preferred equity, which is treated as debt-like. The new first-lien term loan (not rated) matures in 2028, potentially raising refinancing issues in 2027. The preferred equity continues to accrue at 20% annually and is expected to grow from about $373 million in 2024, to more than $850 million by mid-2028.

Alvogen had about $161 million of liquidity at the close of the transaction and is expected to generate about $150 million of cash funds from operations over the next 12 months. However, the headroom on the first-lien term loan’s financial covenant is expected to tighten in 2026, assuming only limited success with new products.

The stable outlook reflects an expectation for debt leverage of about 4.5x in 2025 and adequate liquidity over the next 12 months. However, there is uncertainty about the financial performance in 2026 as the company seeks to offset a significant decline in revenue and EBITDA from current products with the launch of new products.

A lower rating could be considered if Alvogen is expected to default within 12 months. This could occur if sales erosion on existing products is more severe than the base case, or if launches of new products were unsuccessful, resulting in worsening credit metrics and potentially a covenant breach. On the other hand, a higher rating could be considered if Alvogen is able to offset most of the revenue headwinds on existing products with the successful launch of new products and consistently generate free cash flow.

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