Credit Metrics Are Key
I have been keenly focused on Valeant’s credit metrics. Its debt/run-rate EBITDA was an alarming 8.4x in Q1 2017. The company showed some progress after reducing it to 6.8x in the most recent quarter. S&P recent affirmed Valeant’s low credit rating, but suggested it could be reduced to CCC (close to default levels) if its operations were to sour:
S&P affirmed the company’s corporate credit rating at B-, but the next level down would be CCC, which means there’s a serious risk of default. S&P’s affirmation comes following Valeant’s plan to issue $1B in eight-year secured paper in order to pay off $1B in unsecured debt maturing in 2020.
The agency sees the transaction as a “modest credit positive,” but continues to expect leverage to top 7x this year and next. Though Valeant’s scale and revenue diversity are favorable, says S&P, the company faces very high exposure to patent losses over the next two years without a product pipeline sufficient to offset lost revenue.
Asset sales may have aided Valeant’s credit metrics. For instance, by waiting until the end of a fiscal quarter to sell assets and pare debt, Valeant got the benefit of the divested company’s quarterly EBITDA. The numerator (debt) in the debt/EBITDA calculation was lowered by debt pare downs; the denominator (EBITDA) may have been higher by waiting until the end of the quarter to divest an asset. One asset sales are halted these types of distortions may go away.
Secondly, the company must prove it can generate revenue from new products to help offset LOE. Valeant built is reputation as a serial acquirer of brands. Now it’s time to prove it can run a traditional pharmaceutical company and deliver new products from its R&D pipeline.
Conclusion
Asset sales and debt pare downs have been nice, but Q4 will likely show another quarter of double-digit revenue declines. At nearly 9x run-rate EBITDA VRX remains a sell.
