Valeant Default: A Big Bluff?

| About: Valeant Pharmaceuticals (VRX)


Valeant has until June 11, 2016 to file its 10-K or it's going to be in technical default.

Centerbridge Partners threatened to put Valeant in default if it doesn't.

Centerbridge Partners is a non-issue because it's a distressed investor hoping for a quick buck.

I've been following the Valeant (NYSE:VRX) mess since the stock was coming down from the $200 price range. Bill Ackman kept saying that VRX was undervalued, while his detractors said the business model wasn't sustainable. It all came crashing down when there were some accounting irregularities and the company couldn't file its financial statements. This in turn created widespread panic in the investment community about a possibility of a technical default. However, the first glimmer of hope was when investors heard about an amended debt agreement. That all came crashing down when a bondholder threatened to issue a default notice if the company didn't file its annual statements on time. The bondholder being Centerbridge Partners.

There's plenty of reasons to sell Valeant, but Centerbridge Partners isn't one of them. Before the news broke out on Centerbridge, there was a majority lender that supported to waive a default. This is a huge sign that Centerbridge Partners is just in the name to be a nuisance and to get a quick profit. Readers have to realize that Centerbridge is a distressed debt investor. The key to distressed debt investing is to purchase bonds below their par value and sell them at par by forcing a company into redeeming them or recovering the value through bankruptcy court. Having spoken to people at Centerbridge Partners in the past, I know that their reputation is ruthless among even other distressed debt investors.

It's highly likely that they picked up the bonds at 70 when everyone was panicking, and they're trying to profit with a "riskless" trade. Remember Valeant has until June 11, 2016 to file its 10-K? If Valeant files its 10-K, the bonds will trade up from 70 - even by a little. If not, Centerbridge will force Valeant to pay them if the company doesn't want its entire debt stack to be accelerated. Centerbridge can do that through a workout - to get paid at par or close to par to leave Valeant alone, which would be a 42% return in one month.

This is probably the most likely way they're trying to extract value from their debt investment. However, they do have a backup plan. They can extract value through Valeant's assets. The only reason Centerbridge Partners would've invested in the bonds in the first place was if they were secured by actual assets - the companies that Valeant has acquired. In the worst case, Centerbridge will force the company into bankruptcy and sell the company off in pieces to recover its investment.

Centerbridge entered into a trade where there's little to no downside because in the worst case scenario they'd be protected by the assets. This tells me that they actually do believe the assets will cover the debt expenditures, something a lot of people worry about.

I do believe Centerbridge Partners is being a nuisance, and it's not a real reflection on the company's ability to generate cash flow. That being said, I would not initiate or sell the company at this time. This is for those who are stuck in Valeant and are thinking about getting out because of this recent development. There are other reasons for selling, but this issue isn't one of them.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.