Valeant Has Too Much Debt

| About: Valeant Pharmaceuticals (VRX)
This article is now exclusive for PRO subscribers.


Management took on too much debt in acquisitions.

Much of the fixed income yields in 10% to 11% range.

$30 billion in debt, not counting other liabilities.

Highflyer Valeant's (NYSE:VRX) bonds have sold off with the bad news surrounding the company. Management piled on debt while rolling up several, high-quality companies into one.

Valeant filed a Form 12b-25 with the SEC, which is a late filing form. According to a recent 13-G filing, Pershing Square holds 9% of the stock.

According to the latest quarterly report, the company had $1.42 billion in cash, $2.7 billion in accounts receivable, and $1.2 billion in inventory. The liability side showed $4.65 billion in current liabilities and $30.176 billion in debt. Wow! That's a lot of debt. Valeant has given guidance that it will produce $2 billion in free cash flow. The company said that it would pay down $1.7 billion in 2016.

The first bond that we will discuss matures 8/15/21 and is priced at 83. The CUSIP is U9098WAA8. The bond was priced at 103 back in September. The original issue was $650 million. Another issue matures 7/15/22, has a 7.25 coupon, and is priced at 85.6. The CUSIP is U9098VAJ1. The next issue is a Bausch & Lomb that matures 8/1/28. It has a 7.125 coupon and the CUSIP is 071707AG8. It is priced at 76.22. I could go on, but you get the point. All of these issues yield in the 10% to 11% range.

According to the Financial Times, Moody's stated in a report that out of 800 collateralized debt obligations that it follows, 696 have Valeant debt. Moody's has downgraded the debt from Ba3 to Ba1. The CDO that is most heavily tilted towards Valeant is an issue by Apollo with 4.7%. According to the Wall Street Journal, it costs $673,000 to insure against the default of $10 million in face value of bonds. I wonder what would happen if the band that insured that contract went belly up?

This recent interview tells of Bill Gross selling Valeant bonds out of an account three months ago. A bond guy like that is looking at much of what I have included in this article. He is not going to get excited about what drug is coming out next year. I noticed on Morningstar that it has Valeant rated as five stars. I bet some folks go by that rating too.

As you can tell, we won't be buying bonds. I'd rather own the bonds than the stock though. Another risk with the bonds is that a division like Bausch & Lomb gets hived off and your bonds go with it. Which series go with which division? Probably up to management. Then, you either are part of another company, part of a private equity fund, or a standalone company. Either way, it seems the risk exceeds the payoff.

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.