Will Valeant’s Lenders Have to Take a Haircut Through Debt-Equity Swap?

On June 20, Valeant Pharmaceuticals Intl Inc (NYSE:VRX) presented at the Goldman Sachs Second Annual Leveraged Finance Conference. During the Q&A session, CFO Paul Herendeen stated, “I’ve been seeing some flack about this in the investment community, it’s like we’ve said, equity and equity-linked type securities are on the table. Of course they’re on the table, they’re always on the table. When you have a debt stack that looks like our debt stack, it’s not – to say it wasn’t on the table wouldn’t be credible. It’s something that we certainly need to think about.”

Since that statement Valeant shares rose nearly 30%, sending Bill Ackman scrambling.

Wells Fargo analyst David Maris, one of Valeant’s biggest bears, commented, “Based on our experience and feedback from our high yield debt analyst, we think that most debt holders do not have the ability or interest to take cross-structure risk. To us, it would make little sense to do a debt-for-equity swap without ensuring a significant lock-up period. We believe more likely a hedge fund holding equity may have taken a debt position in addition to an equity position, and would look to convert its debt position to equity with certain conditions and benefits. We note that Paulson, which has taken a slightly larger stake in VRX equity, once did an debt for equity swap with the casino operator Ceasars.”

Furthermore, “We believe that Valeant probably anticipated this move with its decision to drop EPS guidance for 2017, in favor of EBITDA, as a debt for equity swap would be significantly dilutive. The thinking of a debt for equity swap is that the remaining debt burden would be lower, making the other debt trade better, making a refinancing more attractive and the risk of bankruptcy lower.”

“We believe that if a debt for equity swap is made, investors should remain focused on the business trends, which remain poor in our opinion, and the consensus forecasts for strong EPS growth in 2018 -2022 which we believe is increasingly unlikely. Additionally, one must question the real costs of previous deals,” the analyst concluded.

Maris rates Valeant shares an Underperform without providing a price target.

According to TipRanks.com, which measures analysts’ and bloggers’ success rate based on how their calls perform, analyst David Maris has a yearly average return of 4.2% and a 49% success rate. Maris has a 21.5% average return when recommending VRX, and is ranked #1585 out of 4588 analysts.

Out of the 14 analysts polled by TipRanks (in the past 3 months), 2 are bullish on Valeant shares, 9 remain sidelined, and the three musketeers are bearish. With a return potential of 8.45%, the stock’s consensus target price stands at $15.70.


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