PAREXEL International Corp. Assigned #B# Corporate Credit Rating, Stable Debt Rated

Stocks and Financial Services Press Releases Tuesday August 8, 2017 09:15
NEW YORK--8 Aug--S&P Global Ratings

NEW YORK (S&P Global Ratings) Aug. 7, 2017--S&P Global Ratings today assigned its 'B' corporate credit rating to Waltham, Mass.-based clinical research organization (CRO) PAREXEL International Corp. The outlook is stable.

We also assigned our 'B' issue-level rating to the company's senior secured credit facility, which consists of a $300 million revolving facility due 2022 and a $2.065 billion term loan B due 2024. The recovery rating is '3', indicating our expectation for meaningful (50%-70%; rounded estimate: 50%) recovery in the event of a payment default.

At the same time, we assigned our 'CCC+' issue-level rating to its $720 million senior unsecured notes due 2025. The recovery rating is '6', indicating our expectation for negligible (0%-10%; rounded estimate: 5%) recovery in the event of a payment default.

PAREXEL International Corp. is a top-tier, global CRO with services from phase I to post-approval. Key risks that define our view of PAREXEL's business are its relatively small size, exposure to cancellation risk, below-average EBITDA margins, and in-progress operational improvements. These risks are mostly offset by its position as a top-three CRO, predictable revenue stream from a $4.1 billion backlog and preferred partnerships with large pharmaceutical companies, and positive industry outsourcing trends. In addition, the rating reflects our expectation for adjusted debt leverage of about 8x in 2018, declining to the mid-6x area by 2019 as the company realizes returns on efficiency investments. We expect discretionary cash flow above $30 million.

Our stable outlook reflects revenue growth of in the low-single digits in 2018 and adjusted EBITDA margins of 16%-17%, reflecting high spending on efficiency projects. Our base case assumes a net book-to-bill ratio of about 1.1x, and we acknowledge the potential for upside in net booked business given the strength of the underlying industry and PAREXEL's reputation.

We consider an upgrade to be unlikely over the next 12 months given our expectation that adjusted debt leverage will rise to about 8x due to investment in efficiency projects. In the future, we could consider a high rating if we believe long-term leverage will remain in the 5x-6x range and the company will generate discretionary cash flow in the $100 million area. In this scenario, PAREXEL will maintain its market share and its efficiency projects will yield adjusted EBITDA margins above 20% (about a 100-basis-point improvement from 2016 margins).

We also believe a downgrade in the next 12 months is unlikely given the predictability of revenue from the company's backlog and the low capital intensity of CROs. We could consider lowering the rating if PAREXEL experiences a decline in its reputation, manifesting in a net book-to-bill ratio at or below 1x. In this scenario, we would expect future covenant tightness and negligible cash flows.


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