Two weeks ago, the catalyst that pushed Valeant CDS to record wide levels implying a 55% probability of default over 5 years, while sending the company’s stock plunging, was news that Valeant was scrambling to engage its lenders to obtain a default waiver to its bank credit agreement to eliminate a technical default that arose when it didn’t file its 10-K before March 15.
As we reported then, “in anticipation of those meetings, owners of Valeant’s senior bank loans are reaching out to investment banks, including Barclays, who will help mediate the negotiations, the sources said. Barclays did not immediately respond for comment.”
As was explicitly warned, the lenders’ demands include higher interest payments and a pledge to pay a larger amount of the bank loans from the proceeds of any Valeant asset sales.
Since then the stock bounced modestly because apparently the algos forgot that when lenders smell blood and a potential default from a debtor without any other recourse, they will demand a pound of flesh. Or maybe two.
Well, moments ago the market got a harsh reminder that Valeant is effectively negotiating default compliance with a group of banks who realize they are dealing with a company that has a $9 billion market cap and can thus ask for anything and management and shareholders have no choice but to say yes unless that $9 billion to quickly go to $0.
According to Bloomberg, Valeant, just as predicted, “is facing push back from some of its lenders as it seeks to waive a default and loosen restrictions on its debt, according to people with knowledge of the matter.”
The resistance may complicate Valeant’s efforts to win the support it needs before the Wednesday deadline for lenders to respond. The company, which has about $32 billion in total debt, must gain approval from more than half of the investors holding its more than $11 billion of secured loans. Those that are balking are demanding a higher interest rate and a better fee, said the people, who asked not to be identified because the discussions are private. They also want to impose some restrictions on the terms the company is offering on the proposal, they said.
Also known as a pound of flesh. Or maybe two.
Bloomberg reports that the initial Valeant “bid” is a 50 basis-point fee and a 0.5 percentage point boost on the interest it pays on its term loans, people with knowledge of the matter said at the time. Banks, however, want more: “Some lenders might see it as an opportunity to extract better pricing or other terms,” Justin Forlenza, an analyst at independent credit-research firm Covenant Review, said in an interview. “They can meet at a certain point that lenders and the company can get comfortable with.”
Now this is only for the default waiver. Additionally, as a result of its collapsing business Valeant has to cure a key negative covenant limiting its interest coverage ratio to just 2.25x. Valeant’s coverage is about to jump to at least 3.00x and here again the banks want moar.
Under the current proposal, the drug maker is also seeking to loosen restrictions on its credit pact that govern a measure of earnings the company needs to maintain relative to its annual interest expense, Valeant said in a statement on March 30. The interest-coverage ratio was set to jump to three times from 2.25 times, with that level set to be tested before the end of June, according to its current agreement with lenders.
Asking lenders to relax loan covenants suggests Valeant may not be able to repay debt as quickly or generate projected earnings, according to Bloomberg Intelligence analyst Elizabeth Krutoholow.
The good news for the banks is that Valeant still has lots of spare cash to pay out, and more importantly zero leverage. And since there are virtually no recent comps for such covenant waiver deals, the banks know that they can demand anything they want and will get it, since management has no choice but to concede to any demand, as the alternative is an outright default and complete collapse in the equity value of the company.
This perhaps explains why after jumping into the $30 range last week, VRX stock is once again back just north of its multi year lows.
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