(FROM THE WALL STREET JOURNAL 3/21/16)
By Sam Goldfarb and Mike Cherney
After stock investors drove down its share price last week, Valeant Pharmaceuticals International Inc. now finds its fate in the hands of its debtholders.
Valeant said Tuesday it would begin talks with its loan investors, as it faces a potential default on its debt if it can't file its 2015 annual report, or 10-K, by late April. People familiar with the matter said conversations through bankers have already begun, as Valeant tries to persuade lenders to give it more time before they can demand early repayment.
A deal is considered highly likely, investors and analysts said, because most debt investors still believe Valeant is capable of paying the interest on its roughly $30 billion debt load, even if the Canadian company doesn't realize shareholders' dreams of a rebound.
Still, lenders are expected to drive a fairly hard bargain partly because, given Valeant's weakened state, they can. Plus, they said, Valeant's business risks can't be ignored.
There are "serious issues here," said Neil Bizily, senior high-yield analyst at Thrivent Asset Management, which owns both Valeant loans and bonds. "Our thinking has changed somewhat since Tuesday's presentation."
That presentation, a highly anticipated earnings call led by Chief Executive Michael Pearson after his return from a two-month sick leave, will likely go down in Wall Street annals as one of the bleaker moments for a company's stockholders.
As Mr. Pearson lowered 2016 guidance and explained his lack of visibility on the filing of the 2015 10-K, Valeant's already battered shares collapsed, falling more than 50% in a single day.
Shares have lost about 90% since their August high, partly out of fear that equity investors would be left with nothingif there were adefault.
The debt has declined, too. Certain Valeant bonds trade at around 75 cents on the dollar, down from 87 cents before Tuesday, according to MarketAxess, while some loans trade at around 94 cents, according to FactSet.
Valeant debtholders played a crucial role in the company's rise. The pharmaceutical maker largely eschewed research as costly and time-consuming and instead acquired drugs, often in deals paid for through massive borrowing. It then aimed to maximize revenue by cutting costs, improving sales and sometimes through increasing prices.
Now, Valeant is shifting away from drug-price increases and takeovers to accomplish them. Mr. Pearson saidTuesdaythe company was exploring asset sales, the profits from which would be used to pay down debt.
In exchange for giving Valeant more time to file its 10-K, lenders could insist that the company increase interest payments and demand stricter financial covenants.
But a business-generated default isn't yet a big worry, debt investors and analysts said. It is difficult to construct a scenario, they said, in which even the company's unsecured creditors wouldn't at least get close to a full recovery in a bankruptcy in the near term.
As it stands, Valeant is projecting adjusted earnings before interest, taxes, depreciation and amortization, or Ebitda, of $5.6 billion to $5.8 billion in 2016. Even if the company is worth just six times that amount in terms of "enterprise value," a conservative estimate according to most analysts, that would still cover all of the bonds, not to mention the roughly $12 billion of more senior loans that it held as of Dec. 31.
If Ebitda were to drop to $5 billion,the bonds would still be covered if the company were valued at 6.5 times its Ebitda. By comparison, Valeant's current stock price implies that the company is worth about seven times its Ebitda, which is at the lowendof its peer group.
Although Valeant's entire business is coming under pricing pressure, "asset coverage looks good to us," said Eric Axon, a health-care analyst at research firm CreditSights. Bausch & Lomb, the eye-care business that Valeant acquired in 2013, alone is likely worth in the neighborhood of $20 billion, Axon said, adding Valeant also owns valuable dermatologic and gastrointestinal drugs.
Barring an unexpected revolt over the delayed 10-K that forces accelerated debt payments, Valeant shouldn't face any immediate liquidity problems, investors and analysts also said. Even at its reduced guidance, it is expected to generate more than $2 billion of free cash flow, and it won't confront significant debt maturities until 2018, when roughly $3 billion of bonds and term loans are due.
(END) Dow Jones Newswires
March 21, 2016 02:47 ET (06:47 GMT)
© 2016 Dow Jones & Company, Inc.
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