Valeant bondholders stand firm
Creditors in no hurry to add to firm’s problems
Valeant Pharmaceuticals International Inc. is giving its investors plenty to worry about. Even so, investors in its US$31 billion of debt have been a relative picture of calm.
In the two weeks or so since the company disclosed an earnings delay, a new U.S. regulatory probe and the resignation of a prominent executive, Valeant’s stock has lost 17.1 per cent, compared with just a 3.7-per-cent loss in the company’s bonds, according to Bank of America Merrill Lynch index data.
The creditors, who are protected by debt covenants that would give them the right to put the company into technical default for failing to release its earnings on time, are showing patience that chief executive Michael Pearson can stick with a promise to halt its acquisition spree and cut leverage. Even if the company’s earnings fall short of expectations, they see value in the drugmaker’s underlying businesses.
“When you’re a high-yield bondholder, you have skin in the game with management — you want them to pull this off,” said Scott Kimball, a Miami-based portfolio manager at Taplin Canida & Habacht, part of BMO Global Asset Management, which oversees US$ 237 billion of assets. “We don’t foresee them having any liquidity issues in the near future. “
Kimball’s firm bought Valeant’s bonds when they were selling at a discount last year.
Valeant’s massive debt load has made it a virtual must- own for the biggest mutual- fund managers who are evaluated on their ability to outperform the broad high-yield debt market. With US$31 billion of outstanding bonds and loans, the company is the fourth- biggest issuer in the Bank of America Merrill Lynch index of highyield bonds. Not owning the debt could mean missing out on a big rally, such as when Valeant’s bonds gained 12 per cent from November to December of last year.
That’s what happened to Los Angeles- based money manager Payden & Rygel, which got rid of Valeant debt when the drugmaker first started making headlines for its pricing practices.
“It hurt us last year when they rallied, but we’ve been shielded from the volatility recently,” said Sabur Moini, global head of high- yield at the firm, which oversees about US$95 billion of fixedincome assets. “We were concerned because they’d grown so quickly all through acquisitions. There’s going to be scrutiny toward acquisitive companies like that.”
Confidence about t he strength of the business coupled with pressure to own the debt may explain why prices on Valeant bonds have held up since it pulled its financial guidance and Pearson as CEO, even though the company’s failure to file a 10- K on time technically breached reporting provi- sions under its bond indentures.
Still, investors have priced risk into the company’s credit- default swaps, which can be used to hedge against default. The cost of protecting Valeant debt from default over five years is at 607 basis points, or US$ 607,445 for US$10 million of borrowings, from about US$ 300,000 in September.
Are presentative f or Valeant declined to comment.
The missed filing could have been considered a breach of the company’s debt agreement, allowing creditors to demand accelerated repayment, had enough bondholders notified the company of the breach, and had Valeant then failed to produce the reports within 60 days of the initial notification.
Creditors have little incentive to enforce the violation, Kimball said. “If you invested in Valeant and you knew they had problems — would you exacerbate that by making them go to bankruptcy court or by making them take up a bondholder dispute now?” he said.
Valeant plans to discuss preliminary fourth- quarter results and update 2016 financial guidance on March 15, the company said on March 7.
The new guidance will probably be lower than what Valeant had previously told investors, but cash flows are likely to “remain largely intact,” CreditSights Inc. analysts led by Eric Axon wrote in a note this week.
The drugmaker said in October that its Ebitda — earnings before interest, t axes, depreciation and amortization — would grow to US$7.5 billion in 2016 and reiterated a commitment to bringing net leverage below four-times Ebitda by the end of this year.