Fitch Ratings-Chicago-May 17: Fitch Ratings has assigned a 'BB-'/'RR1' rating to Valeant Pharmaceuticals (NYSE:VRX) International's (VPI) new senior secured bank facility. In addition Fitch has assigned a 'B-'/'RR4' rating to VPI's senior unsecured notes offering. The net proceeds of this offering, along with cash on hand, are expected to be used to fund the retirement of up to $5.28 billion aggregate principal amount of the outstanding secured term loan, 6.375% senior unsecured notes due 2020, 5.375% senior notes due 2020, 6.750% senior notes due 2021 and 7.25% senior notes due 2022. The ratings apply to approximately $25.6 billion of debt outstanding at March 31, 2018. The Rating Outlook is Stable. A full list of ratings is at the end of this release. KEY RATING DRIVERS Current Refinancing: Valeant will execute a new secured credit facility including a five-year revolver up to $1.2 billion and a seven-year $4.565 billion term loan. The new revolver relaxes the maintenance secured leverage covenant to 4.0x from 3.0x and the secured debt incurrence leverage covenant to 3.5x from 3.0x. The refinancing also includes the issuance of $750 million senior unsecured notes. The repayment of outstanding 6.375% senior notes due 2020, 6.750% senior notes due 2021 and 7.50% senior notes due 2022 eliminates the 2.5x secured leverage incurrence covenants. Lingering High Leverage: Valeant's balance sheet is highly leveraged due to past acquisitions funded in part with significant debt and suboptimal operations management under the leadership of prior management. The company has made decent progress in reducing the absolute level of debt outstanding, having paid down more than $6.9 billion in debt since March 31, 2016 with a combination of internally generated cash flow and proceeds from asset divestitures. However, leverage remains high, with gross debt to EBITDA of 7.4x as of March 31, 2018. To date, deleveraging has depended upon debt paydown as EBITDA has contracted by $1.7 billion since 2015, due to a combination of divestitures executed at relatively favorable multiples, loss of exclusivity on certain products and price and volume headwinds in certain businesses. Product Portfolio Supports Return to Growth in 2019: Valeant operates with a reasonably diverse business model relative to its products, customers and geographies served. Many of the company's businesses are comprised of defensible product portfolios, which Fitch believes are capable of generating durable margins and cash flows. Expected long-term growth for Valeant's eye health (Bausch + Lomb) and gastrointestinal (GI/Salix) businesses support the company's operating prospects, and Fitch believes the dermatology business should return to growth in 2019-2020 upon the launch of new products. This supports an expectation for a return to positive growth in EBITDA in 2019, which is important to the company's longer term efforts to repair the balance sheet. Challenges Remain in Stabilizing Operations: Valeant has made significant progress in shoring up its operating profile during the past six quarters. The company has stabilized its Salix and Bausch + Lomb businesses, investing in additional sales force for Salix and reducing overall firm operating costs through improved efficiencies and divestitures. However, the company continues to face operating challenges on various fronts, including price and volume headwinds in the dermatology business, the loss of patent protection on some of its branded drugs, and litigation. Nevertheless, Fitch views the company's internal and more narrowed focus under the new management team as a constructive underpinning to further improving operations. Reliance on New Products: The stabilization of Valeant's operating profile has involved an increased focus on developing an internal research and development pipeline, which Fitch believes is supportive of the company's credit profile over the long term. However, it is early days, and the company still faces some challenges. Specifically, Valeant needs to ramp up the utilization of recently-approved products. These include Siliq (for the treatment of moderate-to-severe plaque psoriasis, although with safety restrictions) and Vyzulta (glaucoma). The successful approval and commercialization of Duobrii or IDP-118 (dermatology) and Bryhali or IDP-122 (dermatology) should help to strengthen the company's dermatology business. Advancing late-stage pipeline products that are focused on eye health and GI is also important for Valeant's longer-term growth prospects. Near-Term Liquidity Exists: Valeant consistently generates positive FCF and has satisfied most debt maturities until 2021, not taking into account near-term loan amortizations. The company's ability to tap the credit markets for an unsecured notes issue in late 2017 was an important step forward for the prospects of refinancing shorter dated maturities.
DERIVATION SUMMARY Valeant, rated 'B-'/Stable, is significantly larger and more diversified than peers Mallinckrodt (NYSE:MNK) plc (bb-*/Stable) and Endo International plc Endo (bb-*/Negative). While all three manufacture and market specialty pharmaceuticals and have maturing pharmaceutical products, Valeant's Bausch + Lomb (B+L) business meaningfully decreases business concentration risk relative to Mallinckrodt and Endo. B&L offers operational diversification in terms of geographies and payers. Many of its products are purchased directly by customers without the requirement of a prescription. However, Valeant's lower rating reflects gross debt leverage that is much higher than peers. The company accumulated a significant amount of debt through numerous acquisitions. Valeant's prior management also had some operational issues, including suboptimal resource allocation to select businesses. New management has been focusing on reducing leverage by applying operating cash flow and divestiture proceeds to debt reduction. KEY ASSUMPTIONS Fitch's Key Assumptions Within Our Rating Case for the Issuer --Forecasted revenue declining in 2018 and returning to growth thereafter. Fitch expects the loss of exclusivity (LOE) on products in the Bausch + Lomb and, Dermatology, GI and Neuro & Other businesses will be a roughly $470 million headwind to revenues in 2018. The growth of Siliq and potentially Duobrii and Jembdel should help return the dermatology business to growth in 2019-2020. --EBITDA of $3.15 billion to $3.25 billion in 2018 and gradually increasing thereafter, driven by revenue growth, improved sales mix and cost control. --Normalized annual FCF of $1 billion to $1.2 billion. --Continued debt reduction utilizing FCF. --Leverage declining to near 7.0x by the end of 2019. --Fitch projects continued compliance under the debt agreement financial maintenance covenants during the forecast period. RATING SENSITIVITIES Developments That May, Individually or Collectively, Lead to Positive Rating Action --An expectation of gross debt leverage (total debt/EBITDA) durably below 7.0x. --Valeant continues to make progress in stabilizing operations and refrains from pursuing large strategic transactions, and EBITDA growth turns positive in 2019. --Forecasted FCF remains significantly positive. --Debt maturities are successfully addressed well in advance through a combination of debt reduction and refinancing. Developments That May, Individually or Collectively, Lead to Negative Rating Action --Material operational stress returns without a clear path to stabilize in the near term. --FCF significantly and durably deteriorates. --Refinancing risk increases and the prospect for meaningful leverage reduction weakens. --Gross debt leverage (total debt/EBITDA) continues to trend higher from year-end 2018 levels. LIQUIDITY Valeant had adequate near-term liquidity at March 31, 2018, including cash on hand of $909 million (and roughly $1,081 million availability under revolving lines of credit of $1.50 billion at March 31, 2020, with availability reduced by $250 million of revolver borrowings and $169 million in letters of credit. Valeant's new $1.2 billion revolving credit facility matures in 2023. The company's refinancing activities have largely satisfied debt maturities until 2021. After this refinancing and excluding new term loan amortizations, Fitch estimates that Valeant has roughly $2.53 billion maturing in 2021, $1.25 billion maturing in 2022, $6.4 billion maturing in 2023, and $2 billion maturing in 2024. Fitch forecasts 2018 FCF of $1.0 billion to $1.2 billion, and the rating incorporates an expectation that the company will continue to prioritize use of cash for debt reduction ahead of acquisitions or share repurchases. Valeant has consistently generated significantly positive FCF during 2015-2017, despite facing serious operating challenges. Fitch expects the company to maintain adequate headroom under the debt agreement financial maintenance covenants during the 2018-2021 forecast period. FULL LIST OF RATING ACTIONS Fitch has assigned the following ratings: Valeant Pharmaceuticals International --Senior secured bank facility 'BB-'/'RR1' (100%); --New senior unsecured notes 'B-'/'RR4' (39%). Fitch has affirmed the following ratings: Valeant Pharmaceuticals International, Inc. --Long-term Issuer Default Rating at (IDR) 'B-'; --Senior secured notes 'BB-'/'RR1' at (100%); --Senior unsecured notes 'B-'/'RR4' at (39%). The Rating Outlook is Stable. Valeant Pharmaceuticals International --Long-term IDR at 'B-'; --Senior unsecured notes at 'B-'/'RR4' (39%). The Rating Outlook is Stable. Recovery Assumptions The recovery analysis assumes that Valeant would be considered a going concern in bankruptcy and that the company would be reorganized rather than liquidated. Fitch estimates a going concern enterprise value (EV) of $17.9 billion for Valeant and assumes that administrative claims consume 10% of this value in the recovery analysis. The going concern EV is based upon estimates of post-reorganization EBITDA and the assignment of an EBITDA multiple. Fitch's estimate of Valeant's going concern EBITDA of $2.4 billion is 25% lower than the forecasted 2018 EBITDA, reflecting a scenario where the recent stabilization in the base business is reversed and the company is not successful in commercializing the R&D pipeline. Fitch assumes Valeant will receive a going-concern recovery multiple of 7.5x EBITDA. This is slightly higher than the 6.0x-7.0x Fitch typically assigns to specialty pharmaceutical manufacturers, representing Bausch and Lomb's relatively more durable consumer products focus and the company's larger scale and broader product portfolio than peers. The current average 2018 forward trading multiple of Valeant and the company's closet peers is 9.9x. Fitch applies a waterfall analysis to the going concern EV based on the relative claims of the debt in the capital structure, and assumes that the company would fully draw the revolvers in a bankruptcy scenario. The senior secured credit facility, including the term loans and revolver, and senior secured notes, have outstanding recovery prospects of 100% in a reorganization scenario and are rated 'BB-'/'RR1', three notches above the IDR. The senior unsecured notes recover 39% and are rated 'B-'/'RR4'. Contact: Primary Analyst Bob Kirby Director +1-312-368-3147 Fitch Ratings, Inc. 70 West Madison Street Chicago, IL 60602 Secondary Analyst Megan Neuburger Managing Director +1-212-908-0501 Committee Chairperson Britton Costa Senior Director +1-212-908-0524 Summary of Financial Statement Adjustments Financial statement adjustments that depart materially from those contained in the published financial statements of the relevant rated entity or obligor are disclosed below: --Historical and projected EBITDA is adjusted to add back non-cash stock based compensation. Media Relations: Elizabeth Fogerty, New York, Tel: +1 (212) 908 0526, Email: elizabeth.fogerty@fitchratings.com. Additional information is available on www.fitchratings.com. For regulatory purposes in various jurisdictions, the supervisory analyst named above is deemed to be the primary analyst for this issuer; the principal analyst is deemed to be the secondary. Applicable Criteria Corporate Rating Criteria (pub. 23 Mar 2018) https://www.fitchratings.com/site/re/10023785 Corporates Notching and Recovery Ratings Criteria (pub. 23 Mar 2018) https://www.fitchratings.com/site/re/10024585 Parent and Subsidiary Rating Linkage (pub. 15 Feb 2018) https://www.fitchratings.com/site/re/10019836 Sector Navigators (pub. 23 Mar 2018) https://www.fitchratings.com/site/re/10023790 Additional Disclosures Dodd-Frank Rating Information Disclosure Form https://www.fitchratings.com/site/dodd-frank-disclosure/10031326 Solicitation Status https://www.fitchratings.com/site/pr/10031326#solicitation Endorsement Policy https://www.fitchratings.com/regulatory ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTPS://WWW.FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. 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