Valeant Pharmaceuticals Intl Inc (VRX) Refinancing Not a Surprise and Certainly Not Good News

Valeant Pharmaceuticals Intl Inc (NYSE:VRX) shares are tumbling 6% today on the heels of a debt refinancing reveal that could simultaneously lift interest expense while reducing earnings to equity holders. Though top analyst Irina Rivkind Koffler at Mizuho is not entirely shocked by the news, she believes it further bolsters her bearish perspective on the troubled biotech giant.

In reaction, the analyst reiterates an Underperform rating on shares of VRX with a $9 price target, which represents a just under 23% increase from current levels.

VRX will rely on its recently closed sale of assets to L’Oreal to repay $1.1 billion of an approximately 2.8% Term A loan, with a lingering debt due by 2018. The intent is for the giant to take its credit agreement and refinance, issuing new Term B loans that prolong the maturity of existing Term B loans with about $4.3 billion due before 2022. In addition, VRX will issue new secured debt while repaying the rest of its Term A loan with payment of $685 million expected by April 2020. Meanwhile, VRX has made known its objective to pay back a part of its 6.75% secured debt with a 2018 deadline and a $1.59 balance. Lastly, VRX will loosen its $875 million in maintenance covenants in the revolver and cut the covenants from its Term B loans.

“Having just guided to a weaker 2017, with nothing more than ‘trust our commercial execution and our questionable value pipeline’ to reassure investors, we worry that the timing of the refinancing suggests that (1) the organic growth in the underlying business is uncertain and could take significantly longer than expected to play out, and the company would not otherwise meet its debt repayment obligations and/or covenants over the next couple of years. (2) Asset sale multiples may not be meeting previous aspirational targets of 11x EBITA. We did not hear anything reassuring about business growth and outlook on the earnings call last week since dermatology is expected to be down in 2017, B&L may recover primarily due to price increases and lower inventory reductions, and GI may recover only in 2H:17 if the primary care initiative on Xifaxan proves effective,” notes the analyst.

Ultimately, for Koffler, “While the refinancing is not surprising, it reflects the cloudy outlook on future earnings, in our view.”

Irina Rivkind Koffler has a very good TipRanks score with a 53% success rate and a high ranking of #79 out of 4,511 analysts. Koffler garners 21.0% in her annual returns. When recommending VRX, Koffler gains 22.7% in average profits on the stock.

TipRanks analytics show VRX as a Hold. Out of 13 analysts polled by TipRanks in the last 3 months, 2 are bullish on Valeant stock, 8 remain sidelined, and 3 are bearish on the stock. With a return potential of nearly 48%, the stock’s consensus target price stands at $17.18.

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  • VH

    I’m till waiting on Koffler’s call for a $100 fire sale breakup value per Valeant share.

  • Geoffrey Lenart

    I have no idea why this analyst should think that extending repayment terms on loans due out a few years from now has anything to do with organic growth several years out. Rather than state the facts, the analyst has chosen to use the crystal ball approach and venture an opinion on sales that may or may not materialize several years out. Without some sort of detailed analysis, there is no merit to that approach. Clearly the markets are worried about Valeant’s ability to pay its obligations several years out. It is the sign of the times when panic and euphoria have become all too commonplace in the markets. Refinancing is also a very good idea in that it frees up management’s attention to focus on the core businesses rather than lose its focus on endless discussions with less than stable lenders. 15 years ago, the cell tower companies all did this same sort of refinancing. It bought time until the dotcom crash panic subsided.