Valeant's (VRX) Weak Business Could Force it to Refinance Debt - Wells Fargo's Maris
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Wells Fargo's Valeant Pharmaceuticals (NYSE: VRX) analyst David Maris warns that investors should be on the lookout for signs that the second part of their debt thesis -- that Valeant's business is continuing to weaken and as a result Valeant does not have enough cash flow and liquidity to meet its obligations in 2018-2021 - is correct.
"Valeant previously said it believes it has no liquidity issues for 2016, but would not address if the same could be said for 2018-2021," Maris commented. "If even after being granted waivers in 2016 and having planned asset sales, Valeant is still looking to extend its debt maturities, it may be a meaningful sign that Valeant sees business trends as weak enough to be concerned about liquidity."
Maris notes Valeant has $8.2 billion of contractual obligations due in 2017 and 2018, and another $12.6 billion due in 2019 and 2020, which does not reflect increased interest expense related to recent waivers and amendments. Of Valeant's debt, approximately $11.8 billion is in term loans and a revolving line of credit, according to Valeant's 2Q16 10-Q. "If Valeant's business trends are as negative as we think, Valeant may have to turn to debt refinancing to push out maturities," he said. "We estimate recent waivers may be a $0.15 headwind to 2017E EPS and $3 billion of debt refinanced at +150bps could be another $0.10 per share."
"We caution investors that if Valeant refinances its debt at higher rates, one should consider the potential that this is being done because Valeant now sees business trends as sufficiently weak to be concerned about liquidity," he concludes.
The analyst maintained an Underperform rating and $17-$22 valuation range.
Shares of Valeant Pharmaceuticals closed at $22.06 yesterday.
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