The $31 billion in debt that is plaguing Valeant Pharmaceuticals (VRX) could quickly translate into further share-price declines, especially as the horizon of refinancing options narrows and maturities loom.
Valeant's credit securities have recently been taking a beating in secondary markets, as lenders begin to grow concerned over the company's ability to make principal repayments. Near-term debt maturities include more than $500 million in senior secured loans due in April this year, about $1.6 billion of bonds in 2018 and nearly $5 billion in 2020.
As Real Money reported, the more than halving of Valeant's market cap this week was the result of a massive shareholder selloff, indicating that even the staunchest pharmaceutical investors on Wall Street are losing faith in the Canadian drugmaker's prospects of extricating itself from its current regulatory and financial dilemmas.
But aside from the company's growth challenges, pending SEC and Congressional probes, and negative public scrutiny over drug pricing, there is also Valeant's debt burden to consider.
The debt pressure on Valeant could leave management with little in the way of solutions. Sag Harbor Advisors founder and portfolio manager, Jim Sanford, said in a phone interview with Real Money that the company has three primary options, all of which would be dilutive to VRX shareholders. "They will need to sell their best assets, sell more equity or sell equity-linked securities -- like convertible bonds," he said.
The reasoning behind the dismal prognosis, for a company whose shares have already fallen 69% on the year, is that Valeant would have to pay a steep interest rate if it tries to get a traditional refinancing on its debt, Sanford said, who estimated it would cost Valeant about 12% to issue new bonds in order to push out maturities. Valeant's leverage is as high as 6.5x, based on a total debt load of $31 billion and $4.8 billion in its trailing four quarters of reported EBITDA (a standard valuation metric based on earnings before interest, taxes, depreciation and amortization).
"It's high for a zero-growth company that's now playing defense, and they're going to have to devote all that free cash flow to pay off debt," Sanford said. "From an equity standpoint, we need to question its cheapness."
Another concern for shareholders is whether Valeant will be able to make its annual 10-K filing with the SEC before much of its debt violates covenants, potentially forcing the company into technical default, and opening the door to special-situation hedge funds focused on arbitrage.
"All these guys have to do is own 25% of any particular bond issue, make a claim that the company is in technical default and demand accelerated payments," Sanford said. "They'll make money even if they default -- they'll make money either way."