Valeant's Default Notice Should Keep Investors On Sidelines: Wells Fargo Keeps Underperform Rating

Valeant Pharmaceuticals Intl Inc VRX has received a default notice from holders of its 5.5 percent Notes due 2023, due to the delay in filing its 2015 10-K. Wells Fargo’s David Maris maintained an Underperform rating for the company, saying that equity holders were in a “poor position” in Valeant’s capital structure, given the size of debt.

What The Notice Indicates

The bigger news is not the default notice itself, rather it is what the incident conveys about where equity holders “are falling in the lineup of stakeholders at Valeant,” analyst David Maris pointed out. With the recently-granted waivers, debtholders are assured that proceeds from large divestitures would be used to pay down debt.

Maris added that the large divestitures would not benefit shareholders, since lower debt levels would be offset by lower EBITDA and lower earnings. Moreover, Bausch & Lomb is unlikely to be a potential divesture, and is likely to be worth less than what Valeant paid for it.

Investors To The Sidelines

“We believe that the most recent developments should keep equity holders on the sidelines, as to us, the equity holders are in a poor position in the capital structure given the sizable amount of debt,” the analyst wrote. He added that Valeant would need significant refinancing in 2018 to be able to make its debt payments in outer years.

“We believe that Valeant will use effectively all of its free cash flow to pay down debt in the coming years in order to be in a better position to refinance the debt prior to the chunkier maturities,” Maris commented.