GLPG

What is the potential impact on the company's credit rating and future financing costs?

Created August 07, 2025 at 08:02 PM

Short answer:

The creation of 1.8 million subscription rights is a neutral‑to‑slightly‑negative signal for Galapagos NV’s credit profile in the short term. It shows that the board is preparing to raise equity, which can dilute existing shareholders but also strengthen the balance sheet once the rights are exercised. Rating agencies will watch how much cash is actually raised, how the proceeds are used, and whether the equity infusion improves leverage ratios. If the financing is successful and the capital is deployed prudently (e.g., to fund R&D pipelines, reduce debt, or acquire cash‑generating assets), the credit rating could stabilize or even improve and future financing costs may decline. Conversely, if the rights issue is poorly subscribed, leaves the company with a larger equity pool but little cash, or if the proceeds are used for high‑risk projects, the rating could be downgraded and borrowing costs could rise.

Below is a detailed breakdown of the factors that will influence Galapagos’ credit rating and its cost of financing after the subscription‑right plan is announced.

1. What the news actually means

Item	Explanation
1.8 million subscription rights	The board authorized up to 1.8 million new shares that existing shareholders can purchase (typically at a discount to the market price) during a defined subscription period.
Purpose	Not disclosed in the short release, but typical motives are: • Raising equity capital for R&D, pipeline expansion, or strategic acquisitions. • Reducing existing debt (de‑leveraging). • Strengthening the cash‑position for future cash‑flow volatility.
Timing	Rights are usually exercisable shortly after the announcement (often within 30–60 days). The actual cash inflow depends on the subscription rate (percentage of rights exercised) and the subscription price.
Regulatory context	The issuance complies with Euronext & NASDAQ listing rules and local Belgian securities law, which means the process is transparent and subject to shareholder approval if required.

2. How equity issuance via subscription rights can affect credit ratings

2.1 Positive (Rating‑supportive) Effects

Factor	Why it helps rating agencies
Improved leverage ratios (lower debt‑to‑equity, debt‑to‑EBITDA)	A cash infusion reduces net debt or raises equity, both of which lower leverage and are viewed favorably.
Strengthened liquidity (higher cash & cash equivalents, better coverage of working‑capital needs)	More liquid assets improve short‑term solvency metrics (current ratio, quick ratio).
Reduced refinancing risk	If proceeds are used to retire near‑term debt, the company faces less rollover risk, which is a key rating driver.
Funding of growth projects with high upside	If capital is earmarked for promising pipeline candidates that could generate future cash flows, agencies may see a higher earnings upside and a more resilient business model.
Signal of proactive capital management	The board’s willingness to raise equity rather than taking on more debt signals disciplined financial stewardship.

2.2 Negative (Rating‑dragging) Effects

Factor	Why it hurts rating agencies
Shareholder dilution	More shares dilute earnings per share (EPS) and return‑on‑equity (ROE), which can lower profitability ratios that analysts monitor.
Uncertainty of proceeds	If the subscription rights are under‑subscribed, the expected cash inflow may not materialize, leaving the company with a larger equity base but little funding.
Potential for increased cost of equity	A discounted rights price can be perceived as a “fire‑sale” of equity, suggesting market pressure on the stock price.
Use of proceeds on high‑risk R&D	If the funds are earmarked for early‑stage projects without clear near‑term cash generation, rating agencies may view the cash burn as higher, offsetting the leverage benefit.
Signal of cash‑flow constraints	The need to raise equity may be interpreted by the market as indicating that internal cash generation is insufficient, which can be a red flag for creditworthiness.

2.3 Typical Rating Agency Approach

Agency	Typical Metrics Considered
Moody’s	Debt‑to‑EBITDA, net debt/EBITDA, cash‑flow coverage, business risk, and liquidity.
S&P	Leverage, cash‑flow adequacy, balance‑sheet strength, profitability, and capital‑raising track record.
Fitch	Similar to S&P, with added focus on funding strategy and stakeholder confidence.

If the equity raise improves leverage by *≥10 %** (e.g., debt‑to‑EBITDA falling from 2.5× to 2.2×) and the proceeds are used for debt repayment, rating agencies typically maintain the current rating or even upgrade on a “rating‑positive” basis.*

Conversely, if the rights issue is poorly subscribed (<50 % uptake) and the company retains a high leverage ratio, agencies may issue a *rating‑negative** outlook or a small downgrade.*

3. Impact on Future Financing Costs

3.1 Cost of Debt (Bond & Loan Markets)

Scenario	Effect on Cost of Debt
Successful rights issue, proceeds used to retire high‑cost debt	Lower spread on new issuance (e.g., 150 bps → 130 bps) because leverage and interest‑coverage improve.
Successful rights issue, proceeds added to cash reserves	Modest reduction in spreads due to improved liquidity buffer, though the effect may be smaller than outright debt repayment.
Weak subscription, limited cash raised	No meaningful change; spreads stay roughly the same or could even widen if the market views the equity raise as a sign of distress.
Funds allocated to high‑risk R&D without immediate cash flow	Potential increase in spreads if agencies perceive higher cash‑burn, especially if leverage remains unchanged.

3.2 Cost of Equity

The rights issue price is typically set at a discount (10‑20 % below market) to incentivize participation. This discount can be interpreted as:

Immediate dilution cost – existing shareholders bear a reduction in ownership percentage.
Higher implied cost of capital – the market may price the stock higher in the future to compensate for the discounted issue.
Signal to the market – a “fire‑sale” may increase perceived risk, leading to a higher required return on equity (e.g., from 8 % to 9 %).

However, once the cash is deployed efficiently, the long‑term cost of equity can fall because the firm’s risk profile improves (lower leverage, stronger cash flow).

3.3 Overall Weighted Average Cost of Capital (WACC)

Factor	Direction of Impact
Reduced debt ratio	Downward (lower cost of debt).
Equity dilution	Upward (higher cost of equity).
Higher cash reserves / lower refinancing risk	Downward (both components).

If the net effect is a modest reduction in leverage (e.g., from 30 % to 25 % debt in the capital structure) and the cost of debt falls by 20 bps while the cost of equity rises by 10‑15 bps, the overall WACC could *decrease by ~5‑10 bps*.

4. What Galapagos Management Should Communicate

Clear purpose of the rights issue – whether the proceeds are earmarked for debt reduction, pipeline financing, or strategic acquisitions. Transparency helps rating agencies assign a “use‑of‑proceeds” rating factor.
Target subscription level – stating a realistic subscription target (e.g., 80 % of rights) and contingency plans if the target is not met.
Impact analysis – a brief financial model showing the expected change in leverage ratios and cash‑flow coverage after the rights issue.
Timeline – dates for the subscription period, expected close, and intended use of proceeds.
Governance – confirmation that the plan was approved by the Board and, where required, by shareholders, underscoring disciplined capital‑structure management.

5. Bottom‑Line Assessment

Aspect	Likely Outlook
Credit rating	Neutral to mildly positive if the rights issue is well‑subscribed and proceeds are used to reduce debt or fund high‑return projects. A rating‑negative outlook is possible only if subscription is weak and the company’s leverage remains unchanged or worsens.
Future borrowing costs	Potential modest reduction in bond/loan spreads if leverage improves; otherwise, costs stay roughly flat.
Equity cost	Short‑term increase due to dilution; long‑term trajectory depends on how effectively the raised capital translates into earnings growth.
Overall financing profile	The rights plan is a flexible, non‑dilutive (relative to a public offering) way to access capital. Executed correctly, it can enhance balance‑sheet resilience and lower the firm’s overall financing expense.

Final Recommendation for Investors & Stakeholders

Monitor the subscription results (percentage of rights exercised and total cash raised).
Watch the subsequent financial statements (particularly the debt‑to‑EBITDA and cash‑to‑debt ratios) for concrete evidence of balance‑sheet improvement.
Assess the stated use of proceeds; a clear linkage to debt pay‑down or cash‑generating assets will be a strong rating‑supportive signal.
Keep an eye on rating agency commentary post‑announcement. Agencies often issue an outlook change before formally adjusting the rating, and that will give the clearest indication of the credit impact.

In summary, the subscription‑right plan introduces both opportunities and risks for Galapagos’ credit standing and financing costs. The net effect will hinge on execution—how much capital is actually raised, how it is deployed, and how those actions reshape the company’s leverage and cash‑flow profile. If managed prudently, the move should strengthen Galapagos’ credit profile and lower its future cost of capital.