Pharma finances its acquisitions by an approximately even mixture of debt and equity: $4.2 billion and $4.0 billion, respectively. In doing so, the fund is able to gain access to low-cost debt capital. The reduced cost of capital allows Royalty Pharma to pay higher prices for royalties while still providing attractive returns to investors.

Suppose the debt, which is held primarily by banks and other institutions, is split across various maturities: $1.7 billion with an interest rate of 3.00% per year maturing in 3 years, $1.9 billion with an interest rate of 3.25% per year maturing in 4.5 years, and $600 million with an interest rate of 3.5% per year maturing in 5 years. Assume Royalty Pharma operates with a total debt to EBIDTA ratio of 4-to-1, and the median earnings to interest expense ratios (EBITDA/interest expense coverage ratio) of US rated industrial companies are as follows:

RatingCoverage Ratio

AAA 100

AA 36

A 12

BBB 8

BB 6

B 4

What will be Royalty Pharma's interest expense in Year 1 (this upcoming year)? (Note: Your answer should be expressed in units of millions of dollars.)

B) If we use the coverage ratio to estimate the bond rating, approximately what rating would we assign to Royalty Pharma's debt?