S&P Cuts Graceway Pharmaceuticals’ Corporate Credit Rating To ‘SD’ from ‘B-‘

Standard & Poor’s cut its corporate credit rating on Graceway Pharmaceuticals LLC to ‘SD’ from ‘B-‘. The ratings agency also lowered its issue-level rating on the Bristol, Tenn.-based company’s senior secured bank credit facility to ‘CC’ from ‘B-‘. The lowered ratings come after Graceway Pharmaceuticals’ failure to make an interest payment on its $330 million second-lien loan on Aug. 31. The missed payment triggered a cross-default. Graceway Pharmaceuticals is a portfolio company of GTCR Golder Rauner.

PRESS RELEASE

Standard & Poor’s Ratings Services said today it lowered its corporate credit rating on Bristol, Tenn.-based Graceway Pharmaceuticals LLC to ‘SD’ from ‘B-‘. At the same time, we lowered our issue-level rating on the company’s senior secured bank credit facility to ‘CC’ from ‘B-‘, and placed that facility on CreditWatch with developing implications. We also lowered the issue-level rating on the secured second-lien bank loan to ‘D’ from ‘CCC’. These actions follow the company’s failure to make an Aug. 31, 2010 interest payment on its second-lien loan.

The ‘SD’ rating on Graceway reflects the company’s failure to make an Aug. 31, 2010 interest payment on its $330 million second-lien term loan, which triggered a cross-default.

The failure to make the interest payment follows the expiration of the pediatric exclusivity on the compound patent for Adara in February 2010 and the unsuccessful legal barriers to block the introduction of a generic. The subsequent launch of a generic competitor drug to Aldara resulted in sales sharply declining in the second quarter. The recent introduction of Zyclara, Graceway’s follow-on drug to Aldara, have not been sufficient to offset declining Aldara sales. We will monitor the company’s efforts to conduct amendment negotiations over the next six weeks on its 4.25x leverage covenant, as well as its ability to produce a formal term sheet over the next 20 days on both term loans. The term sheet will amended pricing, paydowns, and include a covenant forbearance.

The placement of the senior secured bank credit facility on CreditWatch with developing implications reflects the fact that Graceway has until Oct. 29, 2010 to conduct amendment negotiations on its 4.25x leverage covenant, as well as the company’s indication to lenders that it will have a formal term sheet in less than 20 days amending both term loans. Further rating action will await developments on the success of efforts to amend the term loans.

Media Contact:
David Wargin, New York (1) 212.438.1579, david_wargin@standardandpoors.com

Analyst Contacts:
Michael G Berrian, Boston (1) 617-530-8307
Arthur Wong, Toronto (1) 416-507-2561