Moody's Downgrades Valeant Pharma (VRX) CFR to B3 from B2; Outlook Negative

November 8, 2016 2:14 PM EST

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Moody's Investors Service downgraded the ratings of Valeant Pharmaceuticals International, Inc. (NYSE: VRX) and subsidiaries, including the Corporate Family Rating to B3 from B2 and the Probability of Default Rating to B3-PD from B2-PD. Other downgrades include the senior secured bank credit facilities to Ba3 (LGD 2) from Ba2 (LGD 2) and senior unsecured debt to Caa1 (LGD 5) from B3 (LGD 5). At the same time, Moody's affirmed Valeant's SGL-3 Speculative Grade Liquidity Rating. The rating outlook is negative.

The downgrade reflects Valeant's challenges in turning around its specialty pharmaceuticals business, resulting in weak earnings trends and financial leverage remaining above Moody's earlier expectations.

"Incorporating recent operating trends as well as exposure to upcoming patent expirations, we anticipate that Valeant's debt/EBITDA will remain above 7.0x at least through 2017," stated Michael Levesque, Moody's Senior Vice President.

With higher financial leverage, Valeant will become more vulnerable to any significant operating setbacks or legal liabilities arising from government investigations.

Ratings downgraded:

Valeant Pharmaceuticals International, Inc.:

Corporate Family Rating to B3 from B2

Probability of Default Rating to B3-PD from B2-PD

Senior secured bank credit facilities to Ba3 (LGD 2) from Ba2 (LGD 2)

Senior unsecured notes to Caa1 (LGD 5) from B3 (LGD 5)

Valeant Pharmaceuticals International:

Senior unsecured notes to Caa1 (LGD 5) from B3 (LGD 5)

VRX Escrow Corp. (obligations assumed by Valeant Pharmaceuticals International, Inc.):

Senior unsecured notes to Caa1 (LGD 5 ) from B3 (LGD 5)

Rating affirmed:

Valeant Pharmaceuticals International, Inc.:

Speculative Grade Liquidity Rating at SGL-3

The outlook is negative.

RATINGS RATIONALE

Valeant's B3 Corporate Family Rating reflects the company's very high financial leverage with gross debt/EBITDA above 7.0 times, and significant challenges in turning around the specialty pharmaceuticals segment. This business faces volume and pricing pressure in dermatology and other branded product lines as Valeant continues transitioning from its prior mail order focus towards a retail fulfillment arrangement with Walgreens. Valeant's neurology unit also faces significant pricing pressure, as well as the upcoming patent expirations on several drugs. The company is confronting significant scrutiny on its pricing practices, including those on products acquired through acquisitions, and uncertainty related to government investigations. Elevated financial leverage creates refinancing risk, although Valeant's senior unsecured debt does not face large maturities until 2020.

The ratings are supported by Valeant's good scale in the global pharmaceutical industry with annual revenue above $9 billion, its strong diversity, its high profit margins, and its good cash flow. In addition, the ratings are supported by management's commitment to reduce debt/EBITDA, using excess cash flow for debt repayment. The rating also reflects Valeant's good margins despite erosion in its net pricing levels, and its global presence with well-respected brands including Bausch & Lomb.

The SGL-3 Speculative Grade Liquidity rating reflects adequate liquidity based a combination of factors. Positive factors include ample cash on hand, the lack of any material debt maturities and amortization payments in 2017, and good cash flow. Negative factors include large revolver borrowings and the uncertain impact of litigation.

The rating outlook is negative, reflecting the combination of very high financial leverage, uncertain stabilization of operating trends and unresolved legal exposures. Without greater progress in the turnaround, these factors will constrain Valeant's access to capital, which will eventually be required to refinance debt maturities. The negative outlook also reflects the potential that certain scenarios of business restructuring would be credit negative, if the sales of lucrative business lines leave the company with weaker performing operations.

Factors that could lead to a downgrade include: significant reductions in pricing or utilization trends, escalation of legal issues or large litigation-related cash outflows, or a deterioration in liquidity. Sustaining debt/EBITDA above 7.5 times, or pursuing asset divestitures that leave the company with higher financial leverage and a weaker business profile could also result in a downgrade.

Conversely, factors that could lead to an upgrade include restoring credibility through solid performance and underlying growth, reducing debt with free cash flow, making progress at resolving legal proceedings, and sustaining debt/EBITDA below 6.0 times.

The principal methodology used in these ratings was Global Pharmaceutical Industry published in December 2012. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.



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