Valeant’s Debt Agreement Comes With Freedom to Miss Forecast

  • Drugmaker also gets greater flexibility to sell off assets
  • Earnings can decline further without causing credit event

Valeant Pharmaceuticals International Inc.’s newly renegotiated agreement with lenders will let the drugmaker cut or miss financial projections that some analysts already thought it would struggle to meet.

Under its previous agreement with lenders, Valeant would have had to produce trailing 12-month adjusted Ebitda of at least $4.675 billion to avoid breaching its credit pact. The new agreement will let it get by with about $3.4 billion. Ebitda stands for earnings before interest, taxes, depreciation and amortization and is used as a measure of a company’s ability to pay off obligations.

Valeant reiterated its full-year financial projections on Aug. 9, saying it would have sales of $9.9 billion to $10.1 billion and adjusted Ebitda of $4.8 to $4.95 billion. Those projections will require Valeant to make a significant turnaround in the second half of the year.

Valeant didn’t immediately respond to a request for comment on whether it would cut guidance.

Earlier this month, David Maris, an analyst with Wells Fargo & Co., said it appeared unlikely that the company would make its projections. David Steinberg, an analyst with Jefferies, said meeting the targets “will undoubtedly be challenging.”

New Agreement

Under the new lender agreement, Valeant can fall short of those promises without risking default.

“The results would have to be very poor for a few quarters for the company to run into any trouble,” Eric Axon, an analyst at CreditSights Inc., said after the company announced the successful completion of its debt talks. “This also gives them more time to recover their core operations.”

This is the second time this year the drugmaker, which has about $31 billion in debt, has gotten more lenient terms from debt holders. The company tried to renegotiate terms with lenders in April when it was in default on some of its debt for missing a reporting deadline and its bonds and loans were trading at discounted prices. Valeant had to sweeten terms and offer more money to convince lenders to let it relax its interest coverage maintenance covenant and waive the default.

Sell Assets

By relaxing the terms, Valeant is reducing the likelihood of a violation that could have led the company into bankruptcy.

The new terms free the drugmaker to use credit to pay off loans. It will also be able to sell assets more easily -- before making the most recent changes to its debt agreement, Valeant was allowed to sell 4 percent of consolidated assets a year. The company didn’t disclose details of the new asset sale provisions.

The company’s shares have jumped more than 30 percent in the past two weeks to close at $29.19 on Thursday in New York. Its most actively traded bond, $3.25 billion of 6.125 percent notes that mature in 2025, rose to 87.75 cents on the dollar on Aug. 17, matching a high since February, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.

Higher Rate

Valeant will pay a higher interest rate in return for these concessions. RBC analyst Doug Miehm estimates that would run around $50 million for the current financial year and $55 million next year, along with a $28 million one time fee.

“We view these amendments positively, particularly related to the additional flexibility to sell assets,” Miehm said in a note to investors.

Yet it’s an open question what Valeant can get for businesses it wants to sell. The company was known for taking an aggressive cost-cutting approach when it bought assets and benefited from raising prices on products. While that helped boost sales for a time, it also brought scrutiny and could make any assets less valuable now. Axon said he’s skeptical that Valeant can get the valuations in a sale that Chief Executive Officer Joe Papa cited earlier this month, of 11 times Ebitda.

“Can they get the asset sales done at the multiples they hinted towards?” Axon asked. “That would be a significant deleveraging and so it might be an overly optimistic.”

Valeant’s attempts to get back on track haven’t been without obstacles. The Wall Street Journal has reported that the company is facing a criminal investigation by the U.S. Justice Department. On Monday, the investment firm T. Rowe Price Group Inc. sued Valeant, alleging top executives used a secret network of pharmacies, deceptive pricing, reimbursement practices and accounting tricks to hide its branded drugs from generic competition and artificially inflate revenue and profit.

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