Valeant Looks Better to Bondholders After BotoxCecile Gutscher
A shot of Botox is making Valeant Pharmaceuticals International Inc. more attractive to bondholders already.
With his $45.7 billion bid for Allergan Inc., Valeant Chief Executive Officer Mike Pearson is pulling the credit rating of Canada’s most indebted junk bond issuer closer to investment grade while attempting the biggest takeover in the country’s history.
Relative yields on the drugmaker’s 6.75 percent notes due 2018 narrowed as much as 44 basis points to 255 basis points after the Laval, Quebec-based company offered to buy Botox maker Allergan yesterday, suggesting a one-level rating upgrade. While the deal includes borrowings of $15.5 billion, cash flow at the combined drug makers will rise to more than $6 billion a year, reducing leverage to 3 times and below the threshold for further ratings downgrades of 4 times.
“This company is starting to have the look and feel of an investment-grade company,” said Nicholas Leach, who holds Valeant bonds as part of the C$2.5 billion of high yield debt he manages at CIBC Global Asset Management. “When a company makes an acquisition the bonds typically go down. In this case, the bonds are rallying.”
Beyond the headline-grabbing Botox wrinkle treatment, Valeant is gaining a company with ratings as much as eight levels higher than its own. Valeant’s ratings, BB- from Standard & Poor’s and Ba3 from Moody’s Investors Service Inc., compare with ratings of A+ and A3 on Irvine, California-based Allergan.
Valeant’s current five-year bond spread is consistent with a rating between Ba1 and Ba2, at least a level higher than its actual rating, according to Moody’s Analytics. Pearson told investors yesterday he expects to pay lenders interest at 5.5 percent, in line with the rate paid by similarly rated companies.
Moody’s Investors Service revised its outlook yesterday to “developing” from “negative.”
“It looks like it’s going to be credit-positive because leverage will probably decline, and there is the potential for significant synergies and a boost in Ebitda,” Michael Levesque, the analyst at Moody’s Investors Service who covers the company, said in a phone interview yesterday. Ebitda is earnings before interest, taxes, depreciation and amortization.
Pearson has racked up $17.4 billion of debt in more than 35 deals turning Valeant into Canada’s most acquisitive company since becoming CEO in 2008 and incurring downgrades in the process. S&P’s rating on the company was BB in 2008.
The maker of Kinerase and Dermaglow skin creams snapped up units of drug giants including Johnson & Johnson that were spinning off businesses to reclaim market share from generic rivals. By September 2012, leverage exceeded the maximum threshold allowed under its credit lines of 3 times, forcing lenders to waive the requirement and prompting Pearson to pledge more manageable ratios.
“We’re committed to working on our leverage,” Pearson said in a March 19 interview at Bloomberg’s Toronto office. “If we had an acquisition that was large enough, we could use enough equity to get our leverage down.”
Moody’s has said that Pearson’s strategy of growth by acquisition -- which the ratings firm estimated has left Valeant carrying about 4.5 times more debt than pre-tax earnings -- could lead to a downgrade if that ratio isn’t brought below 4.
The combined company would have $28 billion of net debt, or borrowings as a ratio of Ebitda of 3 times, Valeant said in a statement yesterday. Pearson said in March he could do another transaction this year comparable in size to his debt-fueled $8.7 billion purchase of the eye-care company Bausch & Lomb Inc. without adding leverage.
Barclays Plc and Royal Bank of Canada’s RBC Capital Markets unit arranged $15.5 billion of debt financing to back the offer, which also has the support of the hedge fund manager Bill Ackman, Allergan’s largest shareholder. Ackman, known for staging proxy-board battles and shorting, or betting against, MBIA Inc. months before the 2008 collapse of the mortgage securitization market, structured the Valeant-Allergan plan and approached Valeant with the idea.
Allergan’s board will review the unsolicited bid in consultation with financial and legal advisers and “pursue the course of action that it believes is in the best interests of the company’s shareholders,” the company said in a statement.
“There is some uncertainty,” Sabur Moini, a high-yield money manager at Payden & Rygel, said by phone from Los Angeles today. Moini said he hasn’t increased his exposure to Valeant since the bid was disclosed. “If this deal doesn’t go through, the Valeant bonds could fall a bit. Potentially they may have to pay a little more. These guys are fairly disciplined, so I don’t think they’ll overpay.”
Valeant’s bonds returned 3.1 percent in the first quarter, beating the average 2.9 percent for similarly rated companies in the Bank of America Merrill Lynch U.S. and Canadian Issuers Constrained Index.
“We care about our equity investors, and we care about our bond investors,” Pearson said in the March interview. “Our bondholders have made a lot of money.”