MOODYS.COM 21 MAY 2015 NEWS & ANALYSIS Corporates 2 » Endo's Debt-Doubling Deal for Par Pharma Is Credit Negative » McJunkin Will Cut Debt Load with Preferred Stock Sale, a Credit Positive » Fibria Pulp Expansion Is Credit Positive for Brazilian Forest Products Giant » Siemens' Jumbo Debt Issuance Will Increase Gross Leverage, a Credit Negative » Inmarsat Delays Launch of Third Global Xpress Satellite, a Credit Negative » Atlas Iron Resumes Mining at Lower Cost and Plans to Raise Capital Infrastructure 9 » Exelon, Pepco Merger Clears Major Regulatory Hurdle, a Credit Positive Sovereigns 10 » Indonesia's Narrower Current Account Deficit Lowers External Financing Needs » Kazakhstan Will Transition to Inflation Targeting, a Credit Positive » Mongolia and Rio Tinto Agree to Develop Second Phase of Oyu Tolgoi, a Credit Positive Sub-sovereigns 17 » Chinese Province Extends Maturity Schedule with First 2015 Bond Issuance US Public Finance 19 » Supreme Court Tax Decision for Maryland Is Credit Negative for Counties and Baltimore RECENTLY IN CREDIT OUTLOOK » Articles in Last Monday’s Credit Outlook 21 » Go to Last Monday’s Credit Outlook Click here for Weekly Market Outlook, our sister publication containing Moody’s Analytics’ review of market activity, financial predictions, and the dates of upcoming economic releases. NEWS & ANALYSIS Credit implications of current events 2 MOODY’S CREDIT OUTLOOK 21 MAY 2015 Corporates Endo’s Debt-Doubling Deal for Par Pharma Is Credit Negative On Monday, Endo International plc, parent of Endo Luxembourg Finance I Company S.a.r.l. (Ba3 review for downgrade), said that it will acquire Par Pharmaceutical Holdings Inc., parent of Par Pharmaceutical Companies, Inc. (B2 review for upgrade), for $8.05 billion in cash and equity. The acquisition is credit negative for Endo and credit positive for Par. We put Endo’s ratings on review for downgrade because the acquisition will significantly increase adjusted debt to EBITDA before Endo fully realizes the synergies from its $2.6 billion January 2015 acquisition of Auxilium Pharmaceuticals. The increase in financial leverage comes as Endo faces significant litigation-related cash outflows. We put Par’s ratings on review for upgrade because the acquisition will make it part of a larger, more diversified company. The deal will likely be deleveraging for Par, which has been owned by private equity firm TPG since 2012. Par’s aggressive financial policies, including a debt-funded shareholder dividend paid to TPG in early 2015, have resulted in adjusted debt to EBITDA generally at 5.0x-6.0x. Despite the transaction’s meaningful equity component, Endo will roughly double its debt to acquire Par. Endo will fund the acquisition with a $1.55 billion equity payment to TPG and a $1.5-$2.0 billion secondary equity offering. It will fund the balance, approximately $5 billion, with incremental debt. This will be added to the approximately $5.5 billion of debt on Endo’s balance sheet at the end of March 2015. We estimate that Endo’s current adjusted debt/EBITDA is around 4.0x, pro forma for the acquisition of Auxilium. Our 4.0x pro forma EBITDA estimate gives Endo credit for approximately $175 million of synergies and cost savings that are not yet realized, but that we believe Endo will reap from the transaction over time. Layering on the new debt and EBITDA from the Par transaction, we project 2015 leverage of around 5.5x. However, Endo will receive around $1.5 billion of net proceeds from the divestiture of its AMS men’s health business, which it is selling to Boston Scientific Corporation (Baa3 stable). If we assume that it uses those proceeds to repay debt, adjusted debt/EBITDA would decline to 5.0x. Further, incorporating management’s estimate of Par synergies ($175 million within the first 12 months, including a portion related to applying Endo’s lower tax rate to Par), adjusted pro forma 2015 debt/EBITDA would decline to around 4.7x. The acquisition brings several strategic benefits to Endo. Par is a largely US-based manufacturer and marketer of generic pharmaceuticals with a focus on extended-release and other specialty generics that generally face lower competition because of barriers to entry. Par will augment Endo’s existing generics business, which is focused largely on controlled substances such as opioids. With the addition of the Par products, Endo’s generic revenues will roughly double to about $2.5 billion. Par will also enhance Endo’s product diversity and improve the company’s organic growth outlook. These benefits come at a high cost. Endo is paying approximately 17x Par’s EBITDA for the 12 months ended 31 March 2015. By comparison, TPG acquired Par for 7.0x-8.0x EBITDA in 2012, paying roughly $2 billion (the company subsequently acquired JHP Pharma in 2014 for about $500 million, funded in part with new equity from TPG). Endo has publicly stated a net debt/EBITDA target of 3.0x-4.0x, and management believes it can