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Valeant's Refinancing Explained

Manikandan Raman

Gregg Gilbert of Deutsche Bank reaffirmed his Hold rating on Valeant Pharmaceuticals Intl Inc (NYSE: VRX) and made some preliminary assumptions for the company’s planned debt refinancing.

The refinancing could potentially extend some near-term maturities, reduce floating-rate debt, and increase flexibility with covenants, according to Gilbert. He said the refinancing will include new term loans and secured debt.

Refinancing Assumptions

Valeant plans to use  refinancing to extend maturities for its revolver ($875 million) and certain Term B loans ($4.3 billion), repay Term A loans ($1.7 billion), and repay a portion of its 6.75 percent Senior Notes due 2018 (total principal of $1.6 billion).

“Terms are expected later this week. For now, we model $3.5bn of new debt to repay the Term A loans and half of the 6.75% Senior Notes, and assume the revolver and Term B loan maturities are extended to 2022 (~5 years) for an incremental cost of debt of 50bp,” Gilbert wrote in the note.

In addition, the analyst raised his 2017 revenue estimate to $8.7 billion (from $8.5 billion) based on higher revenue for B+L/International and Branded Rx, partially offset by lower revenue for US Diversified Products.

However, Gilbert cut his 2017 EPS view to $3.81 from $4.52 as he expects higher spending in the form of interest expense.

Analyst Remains On The Sidelines

Meanwhile, Gilbert said he prefers to remain on the sidelines on Valeant shares, pending greater visibility on improved demand trends for Xifaxan, stabilization of the Dermatology business, and further steps to strengthen the balance sheet.

At last check, shares of Valeant were up 0.81 percent to $11.80. Gilbert cut his price target by $1 to $19.

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