New York, June 07, 2016 -- Moody's Investors Service today affirmed the ratings of Valeant Pharmaceuticals International, Inc. ("Valeant") and subsidiaries. The affirmed ratings include the B2 Corporate Family Rating, the B2-PD Probability of Default Rating, the Ba2 (LGD 2) senior secured bank credit facilities, the B3 (LGD 5) senior unsecured rating, and the SGL-4 Speculative Grade Liquidity Rating. The rating outlook remains negative.
Ratings affirmed:
Valeant Pharmaceuticals International, Inc.:
Corporate Family Rating at B2
Probability of Default Rating at B2-PD
Senior secured bank credit facilities at Ba2 (LGD 2)
Senior unsecured notes at B3 (LGD 5)
Speculative Grade Liquidity Rating at SGL-4
Valeant Pharmaceuticals International:
Senior unsecured notes at B3 (LGD 5)
VRX Escrow Corp. (obligations assumed by Valeant Pharmaceuticals International, Inc.):
Senior unsecured notes at B3 (LGD 5)
The rating affirmation reflects Valeant's good cash flow and Moody's expectation that discretionary cash flow will be used for debt repayment. In its affirmation Moody's further considers that required debt amortization is modest, and well within Valeant's free cash flow levels at least until late 2018. The affirmation also reflects Valeant's good margins despite erosion in its net pricing levels, and its global presence with well-respected brands including Bausch & Lomb.
The Corporate Family Rating remains weakly positioned at B2, however, given significant headwinds facing various business lines. Declining price and volume trends are causing declining profitability and a slower pace of deleveraging than Moody's earlier expectations. Moody's anticipates debt/EBITDA above 6.0x during 2016. With steady debt repayment, Moody's projects that debt/EBITDA will decline below 6.0 in early 2017.
RATINGS RATIONALE
Valeant's B2 Corporate Family Rating reflects the company's high financial leverage with gross debt/EBITDA of approximately 6.5x, and significant business challenges related to Valeant's pricing strategy and rapid growth through acquisitions. Valeant is confronting significant scrutiny on its pricing practices, including those on products acquired through acquisitions, and uncertainty related to government investigations. Modoy's believes that recent changes at the CEO level and pending changes at the board level create uncertainties regarding changes in strategic direction, which could include material asset sales.
The ratings are supported by Valeant's good scale in the global pharmaceutical industry with annual revenue approximately $10 billion, its strong diversity, its high profit margins, and its good cash flow. Valeant also has low exposure to patent cliffs, and good underlying prescription volumes of products like Xifaxan for irritable bowel syndrome and hepatic encephalopathy, and various eyecare products and consumer products. In addition, the ratings are supported by management's commitment to reduce debt/EBITDA, using excess cash flow for debt repayment.
The SGL-4 Speculative Grade Liquidity rating reflects non-compliance with financial reporting covenants until the company files its Form 10-Q for the quarter ended March 31, 2016. Valeant will generate good cash flow in excess of required interest and debt amortization payments. However, there is somewhat tight cushion under financial maintenance covenants and limited availability under the revolving facility under the credit agreement. Covenants include a maximum senior secured leverage test of 2.5 times and minimum interest coverage of 2.25 times through March 31, 2016, 2.75 times from June 30, 2016 through March 31, 2017, and 3.0 times thereafter.
The rating outlook is negative, reflecting the uncertainty that underlying trends have stabilized and that the company will meet its near-term debt repayment targets. The negative outlook also reflects the potential that certain scenarios of business restructuring would be credit negative, if the sales of lucrative business lines leave the company with weaker performing operations. Factors that could lead to a downgrade include: significant reductions in pricing or utilization trends, escalation of legal issues or large litigation-related cash outflows, sustaining debt/EBITDA above 6.0 times, or pursuing asset divestitures that leave the company with high financial leverage and a weaker business profile. Conversely, factors that could lead to an upgrade include: restoring credibility through solid performance and underlying growth, reducing debt with free cash flow, making progress at resolving legal proceedings, and sustaining debt/EBITDA below 5.0 times.
Headquartered in Laval, Quebec, Valeant Pharmaceuticals International, Inc. ("Valeant") is a global specialty pharmaceutical company with expertise including branded dermatology, gastrointestinal disorders, eye health, neurology, branded generics and OTC products. Valeant reported approximately $10.6 billion in total revenue for the 12 months ended March 31, 2016.
The principal methodology used in these ratings was that for the Global Pharmaceutical Industry published in December 2012. Please see the Ratings Methodologies page on www.moodys.com for a copy of this methodology.