S&P Removes Valeant Pharma (VRX) from CreditWatch Positive; Ratings Affirmed

S&P Global Ratings today affirmed its 'B' corporate credit rating and 'BB-' senior secured debt rating on Valeant Pharmaceuticals International Inc. (NYSE: VRX) and removed the ratings from CreditWatch with positive implications. We initially placed the ratings on CreditWatch with developing implications on April 14, 2016, and revised the CreditWatch to positive on May 3, 2016. The outlook is stable.

At the same time, we removed the 'B-' senior unsecured debt rating from CreditWatch, where we placed it with developing implications on April 14, 2016.

The recovery rating on the secured debt is '1', reflecting our expectation for very high (90%-100%) recovery in the event of a default. The recovery rating on the unsecured debt is '5', reflecting our expectation for modest (10%-30%, at the lower end of the range) recovery in the event of a default.

"The rating actions reflect the company's revised revenue and EBITDA guidance to levels materially below our prior expectations and the reduced likelihood of an upgrade over the next year," said S&P Global Ratings credit analyst David Kaplan. We now estimate debt leverage will be about 6.2x for 2016 and 5.2x for 2017, up from our previous estimate of about 5.4x for 2016 and 4.7x for 2017.

Our stable rating outlook reflects our expectation for Valeant's debt leverage to remain above 5x through 2017 and less confidence that financial performance will improve from current levels as recent events continue to adversely affect the business. This is offset by our expectation for the company to continue generating substantial free cash flow, and a large and diverse portfolio of pharmaceutical products.

We could lower our rating if we believe reputational, legal, or regulatory developments are likely to undermine the company's ability to generate substantial free cash flow, which would indicate serious issues surrounding the quality and sustainability of the businesses.

There are several paths to a higher rating. We could raise the rating with the passage of time if we gain confidence in the company's ability to reduce and sustain debt leverage below 5x. This could occur if the business has stabilized, and visibility into financial performance is improved. We could also raise the rating if the company reduces debt leverage to below 5x, through asset sales and the allocation of proceeds to debt reduction. Finally, a higher rating could also be achieved with a better assessment of management and governance. This could occur if we conclude that reputational, legal, and regulatory issues are no longer weighing on business prospects.

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