Valeant Will See Forced Selling If Ratings Cut Again, Citi Says

Some of Valeant Pharmaceuticals International Inc.’s debt investors will be forced to sell if Standard & Poor’s cuts its rating on the company’s $19.5 billion of unsecured bonds any further, according to credit analysts at Citigroup Inc.

S&P put the company on Creditwatch Thursday, warning it could potentially downgrade the credit “multiple notches” if the company fails to file its financials or get waivers and consents from lenders in a timely matter. That puts the drugmaker’s unsecured bonds “dangerously close” to a CCC rating that would spark forced selling from investors who aren’t allowed to hold debt rated that low, Citigroup analysts led by Murali Ganti wrote in a research note Thursday.

The move by S&P came after Valeant on Tuesday said it received a notice of default from some of its bondholders, giving the company four fewer days to file its 10-K under its agreement with investors in its $12.7 billion of loans. The company, which has a $32 billion debt load, has been battling souring sentiment in credit markets amid slumping earnings forecasts, lingering concerns over its financial statements and the hunt for a new chief executive officer.

The decision by S&P puts extra pressure on Valeant to file its 10-K on time, the Citigroup analysts wrote. A downgrade to CCC would not only force some investors to sell but also would magnify “already bearish sentiment,” they wrote.

Valeant has said it plans to get the 10-K in by April 29, before the May 27 creditor deadline. Filing the 10-K on schedule could lead to a ratings upgrade if S&P becomes confident that the company will be able to live up to its earnings guidance, the ratings firm said.

Valeant is probably still solvent enough to cover its debt “in a recovery scenario,” the Citigroup analysts wrote, but the chance that creditors will demand early repayment erodes its “margin of safety.”

Citigroup is “overweight” Valeant debt, meaning it expects Valeant bonds to return more than their benchmark peers over the next six months.

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