BTW, Dan is my first name, Shoham is my last name. No need for a "/" between them. There is just one of us.
The "Imagine a conversation" bit was just to show, in a simplified manner that would be understood by non-accountants, how Valeant could be filing with the SEC that the reason the audited report is delayed AHC slowness; when, in fact, the real issue is a Going Concern Disclosure.
The actual manner through which such would transpire would be far less simplistic. Most likely, based on the kind of questions PWC was asking and the type of procedures they were performing, Valeant realized that they are going to get a huge impairment hit on Goodwill, and, a consequent GC. So, they stalled the audit process to give themselves a little time to do "something."
Pure speculation: They probably figured it's coming somewhere near Feb 1, and tried talking their way through it for much of February, before realizing PWC is firm. I am further guessing that there is too much disarray to start a concerted, rapid, orderly liquidation; and a fear that if they are seen trying to sell assets, everyone will realize the magic wand is broken (only in Valeant central, is there a remaining shred of belief that there are people out there who still believe in the magic wand; even Ackman no longer believes in it).
Insurance Fraud Liability = (Philidor revenues) * 3
(RICO RICO RICO)
Not enough to bring the company down on it's own, but another $1B liability on the balance sheet can't be that good.
They should be thankful Philidor got stopped when it did. If it had survived for another year, it might have reached the point of being able to bring the company down on it's own.
That's where you and I totally agree. The question is if PWC is willing to sign an unqualified opinion this year because the inevitable insolvency is further down the line; or are they going to make a stand and GC now. I vote for the latter.
I think the two come together. The Goodwill writedown, while not a cash event itself, is just an accountant-speak way of saying the assets are worth less than we thought before. Since the assets were bought with debt, "less than we thought before" is a short distance from negative equity (owe more than own), which is a short distance from GC.
This is, potentially, the heart of the matter; and could force an immediate GC even if the actual insolvency is multiple years away.
If you are planning on doing some digging, that's where I'd suggest you go and look. Specifically, is there anything in the covenant of
any of the bonds or loans that would break if some figures or ratios (particularly balance sheet ratios, but also revenue numbers) fail to meet a threshold? If there is, do you think the ratio was likely breached.
I'd almost want to dial back and say that the hold-up could be explained by any covenant-breaching trigger, not necessarily, specifically GC (since the same argument -- That Valeant would rather be late, and experience a slow-motion covenant breach than release the report and have an instant breach). But, I am not dialing back, because anything that (incurably) breaches any covenant, would place Valeant in a position of being unable to meet the immediate obligations, and thus instantaneously graduate to a GC.
Said differently: If there is even one tinny winy bond that has some small print saying the company must maintain a book value of at least $X (or else the entire debt amount is immediately due and payable), and other bonds have (fairly standard) language saying that a default on one bond is a default on all, then a big writedown of Goodwill -- big enough to bring the book value below $X -- has the effect of putting the company in an instant cascade of defaults: They failed to meet the tinny winy bond covenant, so they are in default there; consequently they are in default everywhere; consequently they are required to pay back all their debt immediately; but they don't have the cash, so they are no longer a going concern. PWC, which, as part of their job, reads every little clause in every bond agreement, knows that this cascade will happen as soon as they release the audited financial (or, for that matter, as is happening now, if Valeant plays cute and not release it at all), so they have to put a GC.
(if it really is
just one tinny winy bond, they can pay them, and only them, a fee -- before releasing the audited statement -- so they'll agree to take this one clause off; and then block the above-described GC cascade. Valeant is saying they are negotiating with creditors now. They wouldn't be if the Audited was GC-free and it was just a matter of paying some accountants overtime to get it out quickly; so this scenario may well be what's currently playing out).
The bottom line is that there are multiple direct threads that start with Goodwill writedown and end in immediate GC.
(And I always come back to my basic thesis: no matter how bad the Audited report is, if it isn't GC, then it isn't as bad as what Valeant is doing to themselves by not releasing it; therefore, it must be GC).
Dan.
