Investors may think they can now spot a discount in Valeant Pharmaceuticals' (VRX) share price, after more than half of the troubled drugmaker's market cap was erased in a massive selloff Tuesday.
But they need to first look at the company's precarious debt problems before jumping in.
As Real Money reported, bleak revisions to Valeant's already dismal 2016 outlook Tuesday seemed to be more than even the most risk-prone could handle -- the last straw atop stagnant growth challenges: a congressional probe into its pricing policies, a Securities and Exchange Commission investigation into its revenue bookkeeping, and a political firestorm over "predatory pricing" alleged by Democratic presidential front-runner Hillary Clinton.
After all, the company is saddled with about $31 billion in debt, primarily comprising tranches of unsecured bonds that lately have been tanking in secondary markets. And the shareholders should keep an eye on the quickly worsening situation, because at worst it could translate into a complete equity wipe-out.
This is especially true if Valeant's postponed annual 10-K filing with the SEC is further delayed, which means Valeant may violate its bond covenants, and that could even result in technical defaults if not resolved, further putting the screws to the shareholders, who have a vested stake in the drugmaker's overall solvency.
"With all of the debt on ... the balance sheet and the timing of the 10k filing still not certain, we do not believe an 'all clear' signal is warranted," BTIG Research analyst Timothy Chiang said in a Tuesday report. "Little visibility was provided on what assets might be divested. We remain on the sidelines and will continue to watch how the Board reacts to what has occurred today."
The burden of Valeant's debt is most clearly visible in its more than $1.5 billion in annual interest expenses, which has exacerbated shareholder concerns over the drugmaker's rising costs of good sold. For instance Valeant's $737 million in such costs in the fourth quarter are up 25% year over year.
And to get a sense of Valeant's timeframe in its effort to pay down debt, its nearest bond maturity is a $1.6 billion senior unsecured tranche due in August 2018.
Because this debt component -- rated B2 by Moody's and B- by Standard & Poor's -- will be repaid sooner than the rest of Valeant's bonds, they are performing comparatively well in secondary markets at $0.91 on the dollar.
But even these bonds are still in free-fall, trading down more than 7% since Friday, though they appear bulletproof compared to Valeant's other debt components. For example, Valeant's $1.5 billion tranche of senior unsecured notes due 2023 are trading down at $70.91 on the dollar as of Wednesday morning, and have fallen 15% since Friday.
This is a clear indication that -- like shareholders who could be wiped out in a restructuring -- lenders are beginning to fear insolvency is on Valeant's horizon, although lenders are better protected with a stake higher in the firm's capuital structure.
Surely, if lenders continue to balk at Valeant's paper, the financing woes will be heaped onto shareholders as maturities approach, with little to no hope of reasonable refinancing means.
Real Money readers seem to be wary as well. As of Tuesday morning, 41% of the 205 respondents to Real Money's Twitter poll said they see Valeant's stock, which opened at $32.90 Wednesday, falling at least as low as $10, while 29% forecast $20 lows.
Valeant: How low can it go? Read and vote! https://t.co/cfe2o3Hzh5
¿ RealMoney (@TSTRealMoney) March 15, 2016
