As if the historic collapse of Valeant and his hedge fund crashing by 26% YTD was not enough, moments ago S&P added insult to injury when it warned it may downgrade Pershing Square, because “Pershing Square Holdings’ net asset value has dropped substantially, largely because of a precipitous decline in the market value of Valeant Pharmaceuticals” and “as a result, Pershing Square’s debt-to-total assets ratio increased to above 20% as of March 15, 2016, from 15% at the end of October 2015. We are placing our ‘BBB’ issuer credit and senior unsecured debt ratings on the company on CreditWatch with negative implications.”
It concludes that “the CreditWatch negative reflects the fund’s weak investment performance, which has resulted in higher leverage.”
Full note below:
Standard & Poor’s Ratings Services today said it placed its ‘BBB’ issuer credit and senior unsecured issue ratings on Pershing Square Holdings Ltd. (PSH) on CreditWatch with negative implications.
“We placed the ratings on CreditWatch negative to reflect the substantial drop in PSH’s NAV over the past five months as a result of very weak investment performance,” said Standard & Poor’s credit analyst Trevor Martin. NAV was $5.3 billion at the end of October 2015 and $3.8 billion on March 15, 2016, primarily because of the steep drop in Valeant Pharmaceuticals’ stock price. The Valeant stock price fell about 50% on March 15. As a result of the weakness in the portfolio since October, PSH’s debt to total assets has increased from about 15% to above 20%.
While debt as a percentage of total assets has increased materially beyond our original expectations, liquidity (as measured by free cash) has strengthened, and we believe management has taken proactive steps to respond to the turmoil. PSH’s investors were informed that the fund completed a block sale of Mondelez International shares on March 16, raising substantial free cash. Subsequent to the sale, the level of cash held in the fund exceeded total debt.
Valeant’s stock price fell dramatically as the company again revised its earnings guidance for the next 12 months on March 15. Furthermore, the company has not reported its 10-K in time and is now seeking a waiver from banks on its credit agreements, introducing incremental risk of a bankruptcy to Valeant (although it has until the end of April to resolve the covenants in the credit agreement to avoid acceleration). In the event of bankruptcy, we would likely lower the rating.
“We aim to resolve the CreditWatch once we have more clarity on the situation regarding Valeant and we have reassessed the fund’s investment performance and leverage,” said Mr. Martin. “We expect to have the information to resolve the CreditWatch in the next 90 days, but we could extend the CreditWatch period if that is not the case.”
We could lower the rating if Valeant files for bankruptcy or if PSH materially reduces free cash before Valeant’s stock price has substantially recovered. Even if the position were to stabilize, we could still downgrade PSH if the investment performance of the portfolio as a whole deteriorates further.
via Zero Hedge http://ift.tt/1UDrjwC Tyler Durden