Teva Pharmaceutical Industries Ltd (ADR) (NYSE:TEVA) is about to lower its debt load $700 million lower: the Israeli pharma giant revealed yesterday Allergan has agreed to fork over $700 million in a one-time payment to resolve a working capital dispute arbitration. Accordingly, the biotech player has shaken hands with lenders for a covenant-related debt to amend financial leverage ratio covenants. The TEVA team intends to use this payment in the first quarter of this year to pay down its monster debt.
Guggenheim analyst Rohit Vanjani believes the amendment to these financial leverage covenants will offer Teva “some leeway in its restructuring plan.”
For context, “Teva this morning announced an amendment to its financial leverage covenants. The amendment increases the ratio permitted to 5.9x debt/EBITDA in 2H18 (vs. the previous 5.0x throughout 2018),” highlights the analyst, who comments: “While we do not believe that the amendment is surprising given investor and rating agency concerns over the company’s financial flexibility, we view the amendment combined with the recent debt shelf filing as watch items.”
“The new amendment allows for a gradual increase of the net debt leverage ratio permitted to a peak of 5.9x in 3Q18 and 4Q18 (vs. the previous 5.0x throughout 2018), and then declines gradually to 3.5x by 12/31/21,” Vanjani explains, also pointing out that under the new deal, this will lower the capacity of the company’s resolving credit facility from $4.5 billion to $3 billion.
Overall, Vanjani is mixed on the giant, concluding: “While the debt shelf registration from earlier this week and the renegotiated covenant amendments from today may just be best practices, not necessarily indicating that TEVA will raise debt, we do believe that at the very least the recent actions send a mixed message.”
As such, the analyst reiterates a Neutral rating on TEVA stock without listing a price target. (To watch Vanjani’s track record, click here)
TipRanks underscores a play-it-safe attitude when it comes to the beleaguered Israeli pharma giant’s comeback. Based on 20 analysts polled in the last 3 months, 4 rate a Buy, a majority of 11 maintain a Hold, while 5 issue a Sell on the biotech stock. Worthy of note, the 12-month average price target of $18.69 suggests 10% in loss potential for Teva shares.