Advanz Pharma : A very early refinancing; we recommend subscription at 6% or more

We don’t understand why Advanz Pharma is in the market already to seek a three-year extension, while having still three years until maturity and why it is willing to give up an interest rate advantage (IPTs are at c. 7% for the euro piece and c. 9% for the sterling piece, which is higher than current coupons of 5% and 6.25%, respectively), albeit we expect tightening from IPT levels. So, this raises the question what negative newsflow is maybe coming that could affect a refinancing at a later point in time? Management calmed down participants in the global investor call. They referred to market appetite and a potential worsening of the geo/macro picture.
Ocaliva is known, the supply chain issues addressed and just recently said to be solved during H1 25. One item left is the GBP 72m provision for litigation on the balance sheet (pricing and anti-trust allegations). If becoming due it is not threatening survival, in our view, albeit unpleasant and a potential use of cash (PF available liquidity at refinancing is high: GBP 486m).
The remaining topic is the dividend policy and re-leveraging the company (the baskets are there according to the documentation), but in earlier conversations we understood from management that this is not a topic and they repeated this during the global investor call. However, it is naturally not written in stone. Moody’s highlighted that they do not expect a dividend recap (in a diplomatic way saying that this could create rating pressure otherwise). But this warning does not capture maybe ordinary dividend payments. We were told before that net leverage should remain in a corridor of 3x to 4x. Management said now that there is no official target (and M&A can have an impact). We note that bond holders need to prepare somehow for an adverse financial policy change, because owner Nordic Capital will seek monetisation at one point (there is a portability clause at max. 5.5x). Unfortunately, no Nordic Capital representative was on the call to address the likely exit scenario. Starting PF net leverage is 3.7x and if we deduct Ocaliva from day one and assume full payout of litigation provisions we derive at 5x. Apart from this, other risks include the low transparency (pipeline products and a large basket of “other revenue” with basically no information on the products, though quite granular), outsourcing of production with inherent operational risk (as evident recently) and a large portion of off-patent product revenue with a structural decline rate of -3% to -4% p.a. in our view.
On the upside, we like the currently low leverage (for a HY Pharma company), the product pipeline with now more visibility on short-/medium-term revenue/EBITDA contribution (the pipeline is a real differentiator vs. relevant peers) and the positive levered free cash flow profile (even if Ocaliva would be taken out immediately on day one and the inherent cash interest increase).
We affirm our Stable Credit Opinion. In terms of recommendation, we change our recommendation on the existing 2028 SSNs to Neutral (vs. Buy) for formal reasons in light of the refinancing. We recommend subscription to the proposed EUR 615m SSNs at a yield of 6% or more. We do not adopt a recommendation on the GBP piece.