OREANDA-NEWS. Fitch Ratings has affirmed the ratings of RPI Finance Trust (RPI FT), including the 'BBB-' Issuer Default Rating (IDR). The rating action applies to approximately $6.1 billion of debt outstanding on June 30, 2015. The Rating Outlook is Stable.

A full list of ratings affirmed follows at the end of this press release.

KEY RATING DRIVERS
--RPI FT continues to generate strong EBITDA, with margins exceeding 95% due to minimal operating costs.

--Fitch expects leverage to range between 3.0x and 4.0x as acquisitions drive up debt, followed by increased EBITDA (partly acquisition related) and debt reduction.

--RPI FT will experience pressure on revenues as patents lapse for pharmaceuticals that underlie nearly 38% of the company's royalty stream, over the next three years.

--A liquidity event that could once more change RPI FT's organizational and capital structure is approaching by the end of 2018. Such an event would likely provide the company with a new investment horizon.

HIGH OPERATING LEVERAGE
RPI FT's modest operating expenses generate solid earnings with EBITDA margins exceeding 95% annually. The company produced EBITDA of $1.64 billion in 2014 compared to $1.24 billion in 2013. Fitch anticipates operating costs to remain low leading to sustained high EBITDA margins.

ROYALTY STREAM TO FADE
Patent expirations of pharmaceuticals that weigh on RPI FT's revenues will ramp up over the next few years. Revenues from drugs with patents expiring during the next three years represented 35%- 40% of the company's royalty stream at the end of 2014. Fitch anticipates high single-digit to low double-digit revenue and earnings growth through 2017 and meaningful declines thereafter if RPI FT does not acquire additional royalty assets.

ACQUISITIONS NEEDED TO SUSTAIN GROWTH
Fitch believes the company will pursue new product acquisitions to extend the useful life of its aging asset portfolio. The company has some financial flexibility and could execute a transaction of up to roughly $1 billion, given roughly $700 million of balance sheet cash, leverage of approximately 3.6x (covenant: 4.0x) at June 30, 2015, and a $300 million accordion feature on its loan facility.

MODERATELY OSCILLATING LEVERAGE
Fitch expects leverage to range between 3.0x and 4.0x, with acquisitions initially driving up debt and leverage and increased EBITDA/debt pay-downs driving leverage down. Given the significant asset purchases of roughly $4.1 billion during the LTM ended June 30, 2015, leverage has remained above 3.5x. RPI FT's current leverage is well above the 2.8x at year-end 2013. An excess free cash flow recapture provision in the company's $3.5 billion secured term loan facility helps to strengthen debt reduction.

SOLID FCF
RPI FT should maintain free cash flow (FCF) margins above 40% over the ratings horizon despite some pressures on revenues and EBITDA, and meaningful cash distributions to unit holders. Fitch assumptions include annual dividends around 35% of EBITDA to unit holders. The estimate for the distributions is lower than the maximum level of 'permitted distributions' of 45% of EBITDA in the company's credit facilities.

ACQUISITIONS KEY VARIABLE FOR CREDIT
RPI FT ratings reflect Fitch's assumption that the company will maintain a disciplined approach to acquiring royalty assets in order to maintain significant dividend payouts in the face of patent expiries. The company will need to balance a mix of pipeline products with those already approved and on the market. While the risk is higher in acquiring drug assets in late-stage development, the cost is most likely less than those currently on the market are.

2018 LIQUIDITY EVENT POSSIBLE
The potential for a near-term liquidity event adds some uncertainty to RPI FT's capital structure. The company's limited partnership agreement requires it to provide an option to unitholders to liquidate their holdings by the end of 2018. All investment activity must cease, absent any extensions to the investment period or a liquidity event. The company is currently evaluating various options. A liquidity event could stress the company's credit profile, particularly if it entails increasing debt and leverage as a means to buyout unitholders.

KEY ASSUMPTIONS

Fitch's key assumptions within the rating case for RPI FT include:
--Revenues increasing through 2017 and declining in 2018 due to expiring assets.
--EBITDA margin around 95%.
--Unitholder distributions (dividends) of roughly 35% of EBITDA.
--Targeted acquisitions intended to maintain growth in EBITDA and dividends.
--Debt fluctuating between 3.0x and 4.0x EBITDA, driven up by acquisitions followed by debt paydowns.

RATING SENSITIVITIES
An upgrade is unlikely for RPI Finance Trust given that the company's business strategy is reliant on active asset purchases that occasionally push leverage to a level no longer consistent with the current 'BBB-' rating. In addition, uncertainty surrounding the likely approaching liquidity event in 2018 limits ratings upside.

A downgrade would result if:
--RPI FT was intent on completely winding down the royalty-bearing assets without an expectation of meaningful debt reduction.
--A fall in the average weighted useful life of the royalty asset portfolio such that it is no longer commensurate with the debt maturity schedule or if anticipated cash flows cannot satisfy the outstanding debt level.
--The company were unable or unwilling to rapidly reduce high debt leverage following leveraging asset acquisitions.

ADEQUATE LIQUIDITY
RPI FT generates solid earnings from its royalty streams using a modest amount of expenses generating robust CFO that comfortably covers scheduled amortizations and provides for potentially additional debt reduction. FCF is generally very strong, although occasional larger-than-normal dividends create some volatility in this metric. Nevertheless, consistently positive cash flow from operations (CFO) provides RPI FT flexibility to service debt, as well as rewarding unitholders.

Cash balances were $697.7 million and short-term investments totalled $583 million on June 30, 2015. RPI FT had roughly $6.1 billion in loans outstanding at June 30, 2015, with approximately $300 million maturing/amortizing in 2016, $1.16 billion in 2018, $1.93 billion in 2018 and $2.74 billion thereafter.

FULL LIST OF RATING ACTIONS

Fitch has affirmed the following ratings:

RPI Finance Trust:

--Issuer Default Rating (IDR) at 'BBB-';
--Senior secured bank credit facility at 'BBB-'.

The Rating Outlook is Stable.