Moody's assigns definitive rating to drug royalty backed ABS notes sponsored by DRI Capital

New York, December 10, 2012 -- Moody's Investors Service has assigned the definitive rating of Baa2 (sf) to the Secured Notes, Series 2012-1 issued by Drug Royalty II LP 1 (Issuer), an indirect subsidiary of a fund managed by DRI Capital Inc. The Issuer is a bankruptcy-remote limited partnership that issues notes under a master indenture. Series 2012-1 is comprised of floating rate notes (Class A-1), and fixed rate notes (Class A-2), which rank pari-passu for all purposes. The complete rating action is as follows:

Issuer: Drug Royalty II LP 1

Secured Notes Series 2012-1 Class A-1, Assigned Baa2 (sf)

Secured Notes, Series 2012-1 Class A-2, Assigned Baa2 (sf)

RATINGS RATIONALE

Collateral for Series 2012-1consists of 18 drug royalty streams generated from the global sales of 11 drugs.

The definitive rating is based on the following (1) expected royalty payments from a moderately diversified portfolio with a mix of pharmaceutical products that target diversified ailments with a concentration in drugs specifically targeting auto-immune diseases, (2) drugs that are well seasoned in various markets since their regulatory approval, (3) strength of the marketers of the drugs in the portfolio, which include some of the world's leading pharmaceutical companies, (4) sizing of the outstanding notes relative to the expected cash flows, (5) capability of DRI Capital Inc, in its capacity as primary servicer and provider of issuer forecasts; and (6) the structure of the transaction, including legal protections.

Credit support to the notes include (i) dynamic overcollateralization with a minimum size of 30% of the net present value of the aggregate forecasted royalty revenues and (ii) reserve account sized to cover 6 months of interest, with the floor of $1 million.

The total present value (PV), discounted back to September 30, 2012, of the future royalty payments based on the Issuer's forecast at the discount rate of 7% is $334.6 million. Moody's estimates that the weighted average years on market for these products based on present value of the associated royalty payments is approximately 7.4 years and the weighted average years remaining in term of purchase agreement relating to the royalty payments is 6.5 years. There is only a moderate amount of diversification by drug in the portfolio. The biggest drug in the portfolio, by present value of expected future cash flows, is Tysabri (34.1%). The top 3 drugs (Tysabri, Sensipar and Remicade) constitute 63.9% of the portfolio. Mitigating the lack of diversification at the top are the length of time that each drug has been on the market since getting its regulatory approval (over 6.3, 5 and 14.2 years in market respectively), recognition of the efficacy of these drugs in addressing specific chronic ailments as reflected in their sales, manageable competitive threats over the period during which most cash flows will be received and the strong credit quality of their marketers.

The asset value of the portfolio is determined based on a revenue forecast. This forecast is updated at least annually and more often if the aggregate royalty amounts received over the prior four quarters are less than 15% of the most recent forecast of the consultant. In addition to the Issuer's projections an independent pharmaceutical industry consultant's forecasts are also made available on the annual basis. Historically, the Issuer's royalty projections for the portfolio have been conservative relative to actual royalties collected.

The principal methodology used in rating the transaction is described below. Other methodologies and factors that may have been considered in the process of rating this issuer can also be found in the Research & Ratings directory, in the Rating Methodologies sub-directory on www.moodys.com.

Finally, it should be noted that Moody's ratings address only the timely payment of interest and ultimate payment of principal on or before the legal final date of this transaction.

V-SCORE AND LOSS SENSITIVITY

Moody's V Score. The V Score for this transaction is Medium. The V Score indicates "Medium " uncertainty about critical assumptions. Moody's V Scores provide a relative assessment of the quality of available credit information and the potential variability around the various inputs to a rating determination. The V Score ranks transactions by the potential for significant rating changes owing to uncertainty around the assumptions due to data quality, historical performance, the level of disclosure, transaction complexity, the modeling and the transaction governance that underlie the ratings. V Scores apply to the entire transaction (rather than individual tranches).

This transaction has an overall "medium" score because of uncertainty from the lack of historical data from a sector (pharmaceutical) that has not experienced a stress scenario which is largely mitigated due to (i) quality of royalty forecast measured against royalties collected, historically, (ii) simple transaction structure, (iii) low market value risk in the transaction and (iv)the lack of complexity in servicing.

Moody's Parameter Sensitivities. For this exercise, stress scenarios were analyzed to assess the potential model-indicated ratings impact if (a) the base case assumed haircut to royalties forecast was increased from 20% to 30% and 40%, and (b) the probability of cliff event for each drug was increased to 2-times that of the base case. Applying such assumptions, the Baa2 initial rating of the notes might change as follows: (i) with the base case probability of a Cliff event for each drug, the Baa2 initial note rating would (a) remain Baa2 if the haircut is 30% and (b) drop to below B3 if the haircut is 40%, and (ii) if the cliff event probability is two times that of the base case, the Baa2 initial note rating would (a) remain at Baa2 if haircut is 20%, (b) drop to Baa3 if haircut is 30%, and (c) drop to below B3 if haircut is 40%.

Parameter Sensitivities are not intended to measure how the rating of the security might migrate over time; rather they are designed to provide a quantitative calculation of how the initial rating might change if key input parameters used in the initial rating process differed. The analysis assumes that the deal has not aged. Parameter Sensitivities only reflect the ratings impact of each scenario from a quantitative/model-indicated standpoint. Qualitative factors are also taken into consideration in the ratings process, so the actual ratings that would be assigned in each case could vary from the information presented in the Parameter Sensitivity analysis.

PRINCIPAL METHODOLOGY

Moody's uses a Monte Carlo simulation based analysis across various scenarios that affect how royalty cash flows pay down the Notes. For each scenario, simulation output, which are probability and severity of default of the Notes, guides our opinion on the rating of the Notes.

The key variables identified by Moody's to rate notes backed by drug royalty transactions include 1) projected sales and royalties of the pharmaceutical products in the portfolio; 2) probability of a cliff event for a drug- arising due to product withdrawal and/or competition; 3) probability of default of the manufacturer and/or marketer of a drug ; 4) shift in exchange rate relative to US Dollar (USD) that affect royalty payments from non USD denominated sales.

In determining the parameters for each variable, Moody's relies on a combination of historical data, market knowledge of current and future trends in the pharmaceutical industry, and the servicer's track record in royalty payment projection. More specifically, for the haircut applied to the Issuer's projection on the sales and royalties of the pharmaceutical products, Moody's analyst covering pharmaceutical companies is consulted; the Issuer's projection is compared with that provided by a third party consultant; and the accuracy of the Issuer's projection is reviewed by comparing historical projections with actual collections. Cliff risk for each product in the portfolio is assessed individually based on its seasoning, the product type, competitive landscape , characteristics of the underlying patent(s), and trends in the pharmaceutical industry. The manufacturer and/or marketer's default probability is based on a two notch downgrade to its current Moody's rating. For manufacturers and/or marketers not rated by Moody's, a credit rating of Caa2 is assumed.

In our approach, simulation results across various scenarios are studied. In each scenario, the following are assumed (a) fixed haircut to projected royalties, (b) for foreign (non USD denominated) sales, fixed shift in exchange rate versus USD, and (c) 3-month LIBOR curve. For each scenario, the Monte-Carlo based model simulates for each drug its (a) cliff event, using the probability assumed for the cliff event for that drug, and (b) the manufacturer/marketer default, using the probability of default implied by a two notch downgrade to the then current marketer's credit rating. Once a cliff event occurs for a drug, the associated cash flow is decreased to 0 over x quarters (where, x is a model input. We considered scenarios where x ranged from 2 quarters to 12 quarters) and stays at 0 for the remaining term of the purchase agreement. If the manufacturer or marketer defaults during the life of the transaction, the associated cash flow goes to 0 immediately to reflect the uncertainty of the bankruptcy proceedings. However, after two quarters, a Baa3-rated manufacturer and/or marketer is assumed to take over the product and the cash flow reverts back to the pre-bankruptcy projections. This assumption reflects our belief that the pharmaceutical products are valuable assets and they will be sold and marketed even if the manufacturer or marketer files for bankruptcy. As long as the products are sold, the manufacturer or marketer is obligated to pay royalties. Cash flow, thus simulated, pays down the Notes as per the applicable priority of payments.

REGULATORY DISCLOSURES

The Global Scale Credit Ratings on this press release that are issued by one of Moody's affiliates outside the EU are endorsed by Moody's Investors Service Ltd., One Canada Square, Canary Wharf, London E 14 5FA, UK, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that has issued a particular Credit Rating is available on www.moodys.com.

For ratings issued on a program, series or category/class of debt, this announcement provides relevant regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides relevant regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides relevant regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

Information sources used to prepare the rating are the following: parties involved in the ratings; parties not involved in the ratings; public information; and confidential and proprietary Moody's Investors Service information

Moody's did not receive or take into account a third-party assessment on the due diligence performed regarding the underlying assets or financial instruments in this transaction.

Moody's considers the quality of information available on the rated entity, obligation or credit satisfactory for the purposes of issuing a rating.

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Please see the ratings disclosure page on www.moodys.com for general disclosure on potential conflicts of interests.

Please see the ratings disclosure page on www.moodys.com for information on (A) MCO's major shareholders (above 5%) and for (B) further information regarding certain affiliations that may exist between directors of MCO and rated entities as well as (C) the names of entities that hold ratings from MIS that have also publicly reported to the SEC an ownership interest in MCO of more than 5%. A member of the board of directors of this rated entity may also be a member of the board of directors of a shareholder of Moody's Corporation; however, Moody's has not independently verified this matter.

Please see Moody's Rating Symbols and Definitions on the Rating Process page on www.moodys.com for further information on the meaning of each rating category and the definition of default and recovery.

Please see ratings tab on the issuer/entity page on www.moodys.com for the last rating action and the rating history.

The date on which some ratings were first released goes back to a time before Moody's ratings were fully digitized and accurate data may not be available. Consequently, Moody's provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.

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Jiang XuAsst Vice President - Analyst Structured Finance Group Moody'sInvestors Service, Inc.250 Greenwich StreetNew York, NY 10007 U.S.A. JOURNALISTS: 212-553-0376 SUBSCRIBERS: 212-553-1653Michael McDermitt VP - Senior Credit Officer Structured Finance Group JOURNALISTS: 212-553-0376 SUBSCRIBERS: 212-553-1653 Releasing Office: Moody's Investors Service, Inc.250 Greenwich StreetNew York, NY 10007 U.S.A. JOURNALISTS: 212-553-0376 SUBSCRIBERS: 212-553-1653(C) 2012 Moody's Investors Service, Inc. and/or its licensors and affiliates (collectively, "MOODY'S"). All rights reserved.

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