Valeant has been fielding reverse inquiries from bondholders who are looking to engage in private debt-for-equity swaps that would be executed in one-off transactions, according to two sources familiar with the matter. Such deals could be done piecemeal, helping the specialty pharmaceutical company delever at the cost of incrementally diluting common shares, but with an eye toward boosting long term equity value under a lower debt stack, the sources added.
Such a strategy was popular last year during the oil downturn, as over-levered borrowers including Chesapeake Energy, Midstates Petroleum and Comstock Energy all pulled off periodic equity swaps of certain funds with unsecured bond positions.
Valeant management touched on the specific prospect of debt-for-equity deals during one-on-one investor meetings carried out earlier this month as reverse inquires continue to come forth, one of the sources noted.
Valeant has been public in its aims to slash interest costs by reducing leverage to at least 5x from its current level of around 7x – a difficult prospect given pricing and volume pressure, as well as upcoming losses on some marketing exclusivities.
Nevertheless, the company has touted increased sales for a key drug, Xifaxan, and has also relayed to investors the potential for a mandatory convertible bond offering to help chip away at a 2020 maturity wall, said the sources.
“I think they’re prepping the market” for some kind of deal, but “it’s unclear when it will happen,” said a buyside source. Management did note during this week’s Goldman Sachs Leveraged Loan conference that it wouldn’t do a [convertible bond] deal at the current stock price of around USD 13 per share, the buysider added.
Executives have repeatedly told investors that “all options are on the table,” so it’s no surprise that they would talk to investors about any ideas they may have to reduce the interest burden, said a bondholder.
Indeed, management has even tossed the idea of acquiring debt in the open market using balance sheet cash, said two additional buysiders. Liquidity at 31 March includes USD 1.2bn of cash and availability on its USD 1.2bn revolver due 2020, with USD 525m drawn.
Given the company’s sizeable USD 4.9bn of debt that matures in 2020, a multipronged approach is likely since no one approach could take care of the entire stack, according to the second buysider.
The company’s unsecured 2020 debt stack has traded up in recent weeks, with the USD 690m 7% senior unsecured notes due 2020 trading on 21 June at 97 for an 8.054% yield versus its trade of 95 in early June, according to MarketAxess. The USD 2.25bn 6.375% senior unsecured notes due 2020 at 96 on 21 June for a 7.7% yield versus its level of 94 in early June.
While near-term earnings potential has improved, the company’s long-term outlook remains gloomy given key drugs such as Nitropress and Isuprel are losing marketing exclusivities.
Furthermore, the company continues to have litigation overhang with shareholders including a lawsuit from T. Rowe Price filed last August alleging Valeant and its executives fraudulently “destroyed billions of dollars in shareholder value.”
Messages left for Valeant officials were not returned.