Valeant Offers Lenders More Cash for Looser Terms

Valeant Pharmaceuticals International Inc. is offering its highest-ranking creditors more control over its cash in return for giving it additional flexibility to tackle its more than $30 billion debt load.

The embattled drugmaker that grew its business through more than 50 acquisitions wants investors in its loans and credit line to give it the flexibility to sell more of those assets — on the condition that proceeds be used to repay secured borrowings, according to a person with knowledge of the matter. The company is also seeking to permanently loosen the ratio on its interest coverage maintenance covenant to two times from 2.75 times, said the person who asked not to be identified without authorization to speak publicly.

In return, Valeant is offering to boost the interest rate on its loans by 0.5 percentage point and pay lenders a one-time fee of 0.25 percentage point, said another person.

The company needs approval from more than 50% of the lenders on its roughly $12 billion of loans and revolver to revise the credit agreement, regulatory filings show. Banks represent about 25% of the investor base in that senior debt and are in support of the changes, one of the people said.

A Valeant representative declined to comment on the proposed changes to the credit pact.

If approved, the changes will — at least for now — provide Valeant with relief from one of investors' biggest worries: that the Laval, Quebec, company would breach the terms on its debt, potentially setting off a chain of events that could be disastrous for shareholders.

Separately, the Wall Street Journal reported Wednesday that federal prosecutors are investigating whether Valeant defrauded insurers by hiding its ties to a mail-order pharmacy, Philidor.

Higher Fee

Some of Valeant's lenders said Tuesday before terms were proposed they'd be willing to work with the company on an amendment if they could secure a generous fee or a higher interest rate, according to other people with knowledge of the matter who asked not to be identified without authorization to speak publicly.

This is the second time this year that Valeant is asking for relief from its lenders. The company tried to renegotiate terms with lenders in April when it was in default on some of its debt for missing a reporting deadline and its bonds and loans were trading at steeply discounted prices. Valeant had to sweeten terms and offer more money to convince lenders to let it relax its interest coverage maintenance covenant and waive the default.

Valeant's credit agreement restricts it from selling more than 4% of its assets, something that it needs to change before it can follow through on its plan for divestitures. The company's bonds and loans surged Tuesday after Valeant reaffirmed its earnings guidance for the year and CEO Joe Papa unveiled plans to sell about $8 billion worth of assets in the next year or so.

Coverage Ratio

The interest coverage ratio was supposed to step up to 2.75 times starting in the second quarter, meaning Valeant had to generate at least $4.675 billion of 12-month Ebitda — enough to cover its $1.7 billion of interest expense at least 2.75 times. Ebitda, a measure often used to assess how much cash a company can generate for debt payments, stands for earnings before interest, taxes, depreciation and amortization.

Valeant is also seeking to ease restrictions under its credit pact that prevent it from raising junior-ranking debt. Valeant would have to divert proceeds of such offerings to repay senior debt.

Lenders have until Aug. 17 to submit their votes to Barclays Plc, the bank managing the amendment process.

The proposed changes wouldn't affect the other maintenance covenant on Valeant's loans, which requires it to keep secured debt below 2.5 times Ebitda. Loan investors can start asking for their money back if Valeant breaches either test.

The drugmaker has been restricted from making acquisitions worth more than $250 million until it reduces leverage below 4.5 times.

Bloomberg News

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