S&P Places Valeant Pharma (VRX) Ratings on Review for Downgrade

(Updated - March 16, 2016 11:57 AM EDT)

Standard & Poor's Ratings Services placed its ratings on Valeant Pharmaceuticals International Inc. (NYSE: VRX), including the 'B+' corporate credit rating, the 'BB' rating on the senior secured debt, and the 'B-' rating on the senior unsecured debt, on CreditWatch with negative implications. The recovery rating on the secured debt is '1' reflecting our expectation for very high (90%-100%) recovery on that debt in the event of a default. The recovery rating on the unsecured debt is '6' reflecting our expectation for negligible (0%-10%) recovery on that debt in the event of a default.

"The placement of the ratings on CreditWatch with negative implications reflects an escalation of a number of risks for adverse developments, any one of which could weaken creditworthiness," said Standard & Poor's credit analyst David Kaplan.

The company's revised guidance, with meaningfully lower revenue and EBITDA estimates than we expected, will result in debt leverage levels higher than anticipated, and adds greater uncertainty about financial performance.

The delays in filing its 10-K for 2015 will likely result in a violation of reporting covenants this month. While the company has until the end of April to resolve the covenants in the credit agreement to avoid acceleration, and we expect the company to succeed with obtaining those waivers, this introduces incremental risk.

We estimate thinning cushion on financial covenants could constrain financial flexibility, and if performance falls short of current expectations the company could be forced to pursue a covenant waiver or asset sales.

In addition we see the potential for further operational deterioration due to loss of employees or diminished negotiating power with partners now that the company is weakened, and the potential for deterioration in scale and diversification if the company is forced to sell off significant portions of its assets.

Although our 'B-' senior unsecured debt rating reflects our expectation for negligible (0%-10%) recovery in our base-case recovery analysis, which we base on our estimate of the most-likely scenario of default, we believe that recovery prospects for the unsecured lenders could likely be materially improved if the company pursues material asset sales and uses proceeds to reduce secured debt. Alternatively, in the unlikely and unexpected event of a near-term bankruptcy filing, we expect recovery on the unsecured notes would be much higher.

We aim to resolve the CreditWatch placement within 90 to 180 days, once the company resolves its covenant issues, has a chance to complete any near-term asset sales, and provides audited financials, and once we have greater confidence and visibility into operating performance trends.

We will monitor these multiple challenges to ascertain their impact on the rating. In some instances, we could consider a multiple-notch downgrade, for example, if waivers are not obtained from lenders regarding delayed filings.

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