Exclusive: Valeant lenders to prepare tough demands for default talks – sources

NEW YORK (LPC/Reuters) - Creditors of Valeant Pharmaceuticals International VRX.NVRX.TO, which has been in violation of lender agreements since Wednesday, are beginning to demand new terms that could further pressure the drugmaker's business model, according to three people familiar with the matter.

The headquarters of Valeant Pharmaceuticals International Inc., seen in Laval, Quebec November 9 2015. REUTERS/Christinne Muschi

Valeant said on Tuesday it would not meet a March 15 deadline for filing its annual financial statements with securities regulators, putting it in danger of defaulting on its $30 billion debt load. Valeant also sharply reduced its forecasts for 2016 profits.

Shares of the company fell more than 50 percent on the news, cutting its market capitalization to $11.4 billion and deepening concerns about a business model that has relied largely on acquisitions fueled by cheap debt.

The shares have sunk to $33.54 from a high of $263.70 in August as Valeant has come under growing scrutiny for sharp price hikes on its medicines and its ties to specialty pharmacy Philidor Rx.

The risk of default has offered creditors an opportunity to attempt to renegotiate core elements of their agreements with Valeant, potentially saddling the company with higher costs of debt and more restrictions on how it deploys capital, according to people familiar with the matter.

The sources could not speak on the record because they were not authorized to talk to the media.

“This very quickly dematerializes from a growth story into a company that’s really standing still, just looking to right its capital structure,” said Jim Sanford, portfolio manager for Sag Harbor Advisors, which does not hold Valeant shares. “There’s not a lot of equity and market cap to go to, to issue equities and convertible bonds against.”

Valeant declined to comment.

Under its loan agreements, Valeant has until March 30 to file audited financial reports. If it fails to do so, it then has 30 days before lenders can demand accelerated repayment.

Valeant said it would meet with banks next week and ask them for an extension on the deadline. On Tuesday, Chief Executive Michael Pearson said that his best estimate for filing the annual report was April, but that he could not guarantee it.

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.

The informal discussions are in early stages and the demands could change, the sources said. 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, the sources said. They would not provide names of specific lenders.

Under Valeant’s covenants, the company can sell up to 4 percent of its total assets per fiscal year and use the proceeds to pay down bank debt, Justin Forlenza, an analyst at Covenant Review in New York, said in an interview. The company can also carry unused capacity over from one year to the next to increase the potential amount of assets sold to 8 percent, he said.

It is not clear when Valeant may approach its bondholders, who will not be able to force repayment of debt until slightly later than the loan owners.

If the company did approach bondholders, they would likely have similar demands to the loan creditors, according to one person familiar with the matter.