The rating agency believes that given its soft operating performance, Glenmark will have to implement strategic measures – such as the monetisation of its active pharmaceutical ingredient business or the NCE portfolio – to substantially bring down its leverage.
The outlook on Glenmark Pharmaceuticals is revised to ‘negative’ by S&P Global Ratings on Tuesday to reflect a one-in-three chance that its leverage may not recover in line with the rating agency’s expectations over the next six-to-nine months. The negative outlook, which has been revised from ‘stable’, also indicates the refinancing risks of Glenmark’s 2021 senior unsecured notes within the next two years. The rating agency affirmed their ‘BB-‘ issuer and issue credit ratings on the company. Data from Bloomberg showed that total debt of Glenmark Pharmaceuticals stood at Rs 4,448 crore as on March 2019.
The agency said the rating on Glenmark will have low financial headroom over the next 12 months. The firm’s revenue growth in fiscal 2019 (the year ending March 31, 2019) was in line with the expectation of 8%-10%, but its Ebitda margins slipped to 16.7% compared with estimates of 18%-20%. This resulted in a ratio of funds from operations (FFO) to debt of 19.9%, just below the downgrade trigger of 20%.
The stock of Glenmark Pharmaceutical on Wednesday closed the day at Rs 362.70, down by 2.05% or Rs 7.60 on BSE. Glenmark’s operating performance for the first quarter of fiscal 2020 remains weak, with profit slipping further by about 90 basis points, compared with fiscal 2019. “Its revenue growth of 7.3% was also slightly below our 8%-10% estimate for fiscal 2020. This was attributable to the absence of major product launches, subdued sales for its generic Mupirocin cream, continued pressure on dermatology products in the US, and the volatile performance of Latin American markets,” said the rating agency, in its release.
The rating agency believes that given its soft operating performance, Glenmark will have to implement strategic measures – such as the monetisation of its active pharmaceutical ingredient business or the NCE portfolio – to substantially bring down its leverage. In our view, such measures are subject to favourable market conditions and are therefore not part of our base-case assumptions, it said. “A reduction in Glenmark’s leverage over the next 12 months would also be crucial in managing refinancing risks. Glenmark’s 2021 senior unsecured notes are due on August 6, 2021. To maintain the existing rating levels, we expect Glenmark to build up sufficient cash or have firm refinancing plans at least 12 months ahead of the maturity,” said S&P Global Ratings.
The firm’s partial buyback of its foreign currency convertible bonds due on June 18, 2022, using a five-year external commercial borrowing was a step in the right direction, says the rating agency. It reflected the company’s commitment to proactive refinancing, though significant refinancing requirements within a two-year horizon pose a risk to the rating. Glenmark has already received a board approval for raising up to $200 million, which also suggests the firm’s proactive refinancing plans.