While everyone knows about failed rollup Valeant’s equity troubles, which have sent its stock crashing to 5 year lows after the biggest one day drop in history earlier this week, a just as interesting development is taking place with its debt, which incidentally at $31 billion (and accumulated during the company’s relentless acquisition spree over the past few years) is nearly three times greater than the company’s equity capitalization, and is the locus of the biggest problem facing the company currently.
Recall that recently Valeant announced it would be unable to file its 10-K on time, which put the company in violation of its covenants since Wednesday, and also meant it is now in danger of defaulting on its $30 billion debt load. As a result, Reuters reports that the company’s lenders are “beginning to demand new terms that could further pressure the drugmaker’s business model, according to three people familiar with the matter.”
As Reuters adds, “the risk of default has offered creditors an opportunity to attempt to renegotiate core elements of their agreements with Valeant, potentially saddling the company with higher costs of debt and more restrictions on how it deploys capital, according to people familiar with the matter.”
Suddenly, what was until incomprehensible – a Valeant default – appears all too likely: under its loan agreements, Valeant has until March 30 to file audited financial reports. If it fails to do so, it then has 30 days before lenders can demand accelerated repayment. Needless to say, Valeant would be unable to fund such a loan acceleration without rapidly selling off key assets in a liquidation firesale, although there even exist limits on just how many assets Valeant can sell.
Reuters adds that Valeant said it would meet with banks next week and ask them for an extension on the deadline. On Tuesday, Chief Executive Michael Pearson said that his best estimate for filing the annual report was April, but that he could not guarantee it.
In anticipation of those meetings, owners of Valeant’s senior bank loans are reaching out to investment banks, including Barclays, who will help mediate the negotiations, the sources said. Barclays did not immediately respond for comment.
The informal discussions are in early stages and the demands could change, the sources said. The lenders’ demands include higher interest payments and a pledge to pay a larger amount of the bank loans from the proceeds of any Valeant asset sales, the sources said. They would not provide names of specific lenders.
Under Valeant’s covenants, the company can sell up to 4 percent of its total assets per fiscal year and use the proceeds to pay down bank debt, Justin Forlenza, an analyst at Covenant Review in New York, said in an interview. The company can also carry unused capacity over from one year to the next to increase the potential amount of assets sold to 8 percent, he said.
And once Valeant is done with the banks, it then has to deal with the unsecureds: “it is not clear when Valeant may approach its bondholders, who will not be able to force repayment of debt until slightly later than the loan owners. If the company did approach bondholders, they would likely have similar demands to the loan creditors, according to one person familiar with the matter. “
Not surprisingly, impartial onlookers are souring on the Valeant story with every passing day : “This very quickly dematerializes from a growth story into a company that’s really standing still, just looking to right its capital structure,” said Jim Sanford, portfolio manager for Sag Harbor Advisors, which does not hold Valeant shares. “There’s not a lot of equity and market cap to go to, to issue equities and convertible bonds against.”
Recall that as we explained simply yesterday, the Valeant magic only worked because the stock price was high and rising (providing a cheap currency for acquisitions), while the cost of debt was low and falling (allowing Valeant to issue ever more debt offset by the surging market cap). All that is now over, and nobody wants to admit that the next phase in the Valeant lifecycle almost certainly goes through some sort of restructuring.
Well not nobody: as the chart below shows, Valeant CDS has soared to all time high, as has the company’s implied default risk over the next 5 years which as of this moment was 55% and rising. We expect this number to jump in the coming weeks as the true severity of Valeant’s balance sheet problems is fully appreciated.
via Zero Hedge http://ift.tt/1R0JiL2 Tyler Durden