Analysts Weigh in on What Looming Debt Spells Out for Teva Pharmaceutical Industries Ltd (ADR) (TEVA) and Its Uncertain Future

From right and left, analysts to credit agencies are downgrading or cutting expectations on TEVA; here's why.


Teva Pharmaceutical Industries Ltd (ADR) (NYSE:TEVA) took a nearly 20% hit last Thursday after dashing investor hopes with a third quarter print that led key credit rating agency Fitch to slide the debt rating down to junk.

HSBC analyst Steve McGarry joins is another disgruntled voice on the Street who sees Teva’s finances in an “over-stretched” perilous position, and as such, he  likewise downgrades TEVA stock to a Reduce while massively shrinking the price target from $26 to just $6, which implies a 48% downside from current levels. (To watch McGarry’s track record, click here)

For a stock that has already suffered a 71% loss in value through the course of the last year, analysts can only imagine the dire trouble that faces the Israeli pharma giant for McGarry to still predict a further 50% in the coming 12 months to follow suit.

Meanwhile, though Wells Fargo analyst Davis Maris has not budged from the sidelines, he sees debt shadows haunting Teva’s future: “To us, Teva is facing a future where debt payments and the debt overhang will loom large unless the company is able to undertake severe cost cuts and significant divestitures.”

What will it mean for Teva to shift from investment-grade credit spread to a high-yield credit spread in terms of its looming debt? “Significant consequences” could be at play to both cost and refinancing options, writes Maris. Yet, keep in mind Fitch will not impact Teva quite like Moody’s or S&P, where the giant’s $6 billion in term loans would then be truly rattled.

Maris asserts, “Fitch is not a recognized agency by Teva, so it would take either Moody’s or S&P to downgrade before the interest rate adjustment would be triggered (so it is not triggered yet),” adding, “We note that it takes two rating agencies downgrading to high yield to trigger Teva moving out of the investment grade index, so that would happen if either Moody’s or S&P were to downgrade. Teva has $5.5B in maturities in 2018 and $4B each year in 2019, 2020, and 2021, and we believe has a need to refinance its debt.”

Glancing ahead, “Teva estimates the increased interest cost would be approximately 100 to 150 basis points on refinanced debt, although we think this would have to be done over time, as there may not be enough debt capacity in the HY market to refinance several years of debt,” concludes the analyst, who for now maintains a Market Perform rating on TEVA stock without suggesting a price target. (To watch Maris’ track record, click here)

Where does the word of the Street align amid bears baring their teeth after such a dramatic third quarter stumble? TipRanks analytics exhibit TEVA as a Hold. Out of 20 analysts polled by TipRanks in the last 3 months, 3 are bullish on Teva stock, 14 remain sidelined, while 3 are bearish on the stock. With a return potential of nearly 39%, the stock’s consensus target price stands at $16.21.