Mizuho Co-Signs Shock Exchange
Despite the run-up in the shares Valeant is still in dire straits. Its asset sales have raised cash and pared debt, but has not done much for the company’s credit metrics. In effect, management has pulled earnings forward through the asset sales, but will have to forgo cash flow from divested assets in the future. The company has been doing the most – hiving off assets and refinancing its debt – with an uncertain benefit:
While debt has been reduced, there is no evidence the company’s credit metrics have improved. Earlier this month the company priced a $2.0 billion senior note offering at 9.000% due 2025. The net proceeds will be used to repurchase $2.0 billion of notes due 2020 with interest rates ranging from 5.375% to 7.000%. Valeant will incur higher interest costs, but the offering pushed back principal payments from 2020 to 2025 …
The company’s debt load has declined from $30.4 billion at Q3 2016 to $26.2 billion at Q3 2017. However, its debt/run-rate EBITDA was 7.2x at Q3 2016 versus 7.1x at Q3 2017. The company has engaged in a lot of activity for a seemingly uncertain benefit.
The only benefit has been to spike the shares into overvalued territory. Valeant is still highly-indebted. In the Shock Exchange’s opinion, now is a great time to raise equity and cut its debt load:
I have always been of the opinion that asset sales were designed to induce short-covering and spike the share price. Once the stock got to an acceptable range like $25 to $30 per share, I expected management to issue an equity raise in order to improve its credit metrics …
It could behoove Valeant to strike while the iron is hot. Any other potential catalysts could be muted by other events. The launch of glaucoma treatment Vyzulta next year could be muted by the continued loss of exclusivity on older drugs. The Allergan insider trading case could result in legal fees, a disgorgement of profits from Ackman’s Allergan trade (about $390 million) or more negative publicity. In my opinion this could be a major headwind next month and for several months thereafter.
Why should management let a good run-up in the shares go to waste. VRX long should brace themselves for a dilutive event, and a free fall in the stock.
On Trump And The Global Economy
The second installment of Trump And The Global Economy Town Hall took place October 24th in Fort Greene. It Featured Professor Lance Brofman, Coconut Rob (Coconut Rob Smoothies), Wuyi Jacobs (AfroBeats Radio) and Ralph Baker, author of Shock Exchange: How Inner-City Kids From Brooklyn Predicted the Great Recession and the Pain Ahead.
The event was well-received by the community. We parsed through President Trump’s proposed tax plan and [i] how it was pure economic folly and [ii] high net worth individuals could potentially game the system by shifting income around. Apparently, Kansas Coach Bill Self did this when the state of Kansas cut taxes in the past. We discussed the pros and cons of technology on workers and the economy. How will the economy and country prosper under Trump’s leadership vis-a-vis Obama? What’s behind the verbal sparring with black athletes, ESPN’s Jemele Hill and North Korea’s Kim Jong Un?
