A mere 24 hours ago, I posted this:
As seems to be the usual routine with Valeant [..] each statement seems to make a lot of sense on it's own; but when you put them up together the disconnect is jaw dropping.
I was specifically questioning the whole business of paying for an extension:
If they are capable of releasing the audited financial on 4/29, why would they offer serious cash for a month long extension?
I predicted that some (but not enough) lenders will take the cash, and Valeant will make a big hoopla.
My take this time: The lenders wouldn't take the cash in exchange for the delay because they want to start liquidating the company as soon as possible and every day that passes reduces what the company will liquidate for. You can't offer them cash in exchange for staying their hand, because that cash comes out of the eventual liquidation value they will get anyway. Note that not all lenders are created equally. Some are sufficiently secured that they would gladly do a "cash for extension" deal (I'm betting that some of those will accept the Valeant deal in the coming days and Valeant will make a big hoopla of it, trying to create an image that their turnaround strategy is gaining traction).
I surmised that the Valeant approach is to generate an appearance of positive momentum for the next 24 days (while looking for a game changer) through cheery confident announcements. (However, cometh April 29, reality will catch up).
So Valeant makes a cheery announcement, keeps a confident demeanor in their tone, and tries to use the next 24 days to do something game-changer (like a major divestiture). They might keep the ball rolling just a bit longer, with ever more desperate tactics, but we are already in the final days of the implosion (and the 90% drop in stock price proves that the market knows this -- whatever the daily fluctuations might indicate).
So what happened in the next 24 hours:
1nd: Ackman says that the new CEO will take weeks, not months -- VRX is up 20% (on top of 10% the day before when they said the AHC found nothing)
2nd: After hours, they announced that the lenders have accepted their deal -- Up another 5% in AH trading; for a total of about 35% in 2 days (not bad for content-less announcements!)
The small print of the AH announcement is that it was only the secured lenders (the ones I was saying would love to take the deal, since it moves cash to them away from the unsecured ones).
The cash they are paying is quite consequential: 0.5% immediately, and a long-term increase of 1% in interest rate. If everyone accepts the deal (and if not then it's moot anyway), that's about $150M now and another $300M/year. If, say, the average debt is about 5 years, that's about $1.5B moved from the equity holders (assuming they aren't wiped out) to the debt holders.
But, the Valeant investors are back to their old mindlessness: Valeant puts up a rapid barrage of meaningless, but significant-sounding press releases, and the stock price rockets up (never mind that they just gave away 15% of the little equity they had left for nothing more than a 30 days extension to file a report that they say they don't even need).
So, which is it? Do they need the extension? Or don't they? One day they are offering cash for the extension (and saying they don't actually need it), the next day you say that they won't be using the extension in any event, and the very next day they happily announce that the cash-for-extension deal is accepted.
My take: They will continue with a sustained barrage of news that sounds awesome, but are actually quite devoid of any content, until the clock expires on them (in 22 days). If they haven't pulled a major game changer (like a big divestiture), then no amount of positive thinking will save them at that point. My betting is that they will manage to get a few more minor extensions, but will ultimately fail to find a true game-changer.
(Just to clarify that there is a real purpose to the debt negotiation: Assuming, as I am speculating, the audited financials is unclean or has some other covenant-breaching issue [not just lateness]; such would immediately graduate to GC, as discussed in prior posts. However, if VRX get substantially all lenders to agree to overlook the covenant breach, then it would not graduate to GC, and they can continue running the company a little longer -- hoping to find that magical game changer -- before the lenders inevitably take over when they can no longer service their debt).
Dan.
