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Valeant engineering debt swap?

June 26, 2017

Why are shares of Valeant Pharmaceuticals International (VRX) rising and does the market have it right?

According to Evercore ISI analyst Umer Raffat, anytime the market receives a signal of some sort that the embattled drug maker has value beyond its pile of debt, the stock price rises and short sellers cover their positions. Today, a 7.8% spike in Valeant’s share price is linked to speculation that a debt-to-equity swap could be on the horizon, Raffat says.

The single biggest driver behind Valeant’s recent strength has been this statement from management at a broker meeting:

“I’ve been seeing some flack about this in the investment community, it’s like we’ve said, equity and equity-linked type securities are on the table.  Of course they’re on the table, they’re always on the table. When you have a debt stack that looks like our debt stack, it’s not – to say it wasn’t on the table wouldn’t be credible. It’s something that we certainly need to think about.”

Whether a debt swap eventually takes place remains to be seen. Typically, it is a way for a company to reduce debt and a quick path to gain for unsecured debt holders. But a swap can raise a company’s share count, which dilutes earnings.

Also, Raffat warns that as a stock’s price rises in anticipation of a potential swap, it becomes less appealing.

So how is value created?

Of the $29 billion in debt on Valeant’s balance sheet, unsecured debt accounts for $18.2 billion. Roughly $9 billion of that debt are long-dated notes (dated 2023 and older) trading below par at 0.85%.

The 2023 and 2025 unsecured notes are trading ~0.85x par. Valeant will have to offer a “discount” to convert to stock price … and this discount will have to be negotiated Let’s say Valeant offers a 12% discount on $1B worth of unsecured. When you run through this math, the effective trading price of the unsecured notes go from 0.85x to 0.95x

What is the value creation for Valeant from a hypothetical $1B worth of swap? I calculate ~$300M in value creation per $1B of swap: And again, it’s the ~$9B worth of tranches eligible for such value creation max … and within those $9B, some fraction of holders may even look to swap.

At a recent $17.05, shares of Valeant have climbed almost 18% since the start of the year and gained 33% over the past month.


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