Valeant Pharmaceuticals Intl Inc.: What Exactly Is Going On Here?

There was another suspicious press release from Valeant Pharmaceuticals Intl Inc. (TSX:VRX)(NYSE:VRX).

| More on:
The Motley Fool

Valeant Pharmaceuticals Intl Inc. (TSX:VRX)(NYSE:VRX) issued a press release on Wednesday that confirmed it is seeking to extend the deadline for filing its audited financial statements. But there was something else in the press release, something not emphasized by the press.

The interest-coverage ratio

Valeant is also asking its lenders to “amend, among other things, the interest-coverage maintenance covenant.” For those of you who are unfamiliar with this metric, the interest-coverage ratio divides a company’s pre-tax profits by its interest expense. In essence, it measures how many times a company can make its interest payments in a given time period. It’s a widely used measure that helps evaluate how big a company’s debt burden is.

One of the covenants on Valeant’s debt states that this ratio must exceed 2.25 times through March 2016, at which point the minimum increases to three times. During the company’s last conference call, Valeant said this ratio was approximately 3.3 times at the end of 2015 (according to unaudited figures). The company also claimed it expects “to be in compliance with credit agreement financial maintenance covenants for full-year 2015 and throughout 2016 based on guidance.”

But now the story is very different. Valeant is looking for “additional cushion in its financial covenants.” Unfortunately, such an amendment will not come for free. Creditors reportedly will ask for some major concessions, which could easily include greater interest payments in exchange for relaxing covenants.

What exactly is going on here?

If we are to believe Valeant, then the company is simply dealing with a small accounting issue related to the now-defunct Philidor and just needs some extra time. Meanwhile, the company is just looking for some extra wiggle room in its financial covenants. But this is starting to look very fishy.

There are plenty of other things that could be going on. Perhaps there are other accounting issues. Or maybe Valeant is already in breach of a financial covenant. At this point, all we can really do is speculate, but as long as the company hasn’t filed audited statements, anything is possible.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Benjamin Sinclair has no position in any stocks mentioned.  Tom Gardner owns shares of Valeant Pharmaceuticals. The Motley Fool owns shares of Valeant Pharmaceuticals.

More on Investing

four people hold happy emoji masks
Tech Stocks

Here Are My Top 2 TSX Stocks to Buy Right Now

Boasting solid growth prospects, these two TSX stocks are my top picks for investors with a stronger stomach for market…

Read more »

RRSP Canadian Registered Retirement Savings Plan concept
Dividend Stocks

Building an RRSP Fortune: 4 Key Insights

The RRSP is not only a tax-saver but a wealth-builder for Canadian income earners.

Read more »

Sliced pumpkin pie
Dividend Stocks

Market Sell-Off: Why These 2 TSX Blue-Chip Stocks Are Too Attractive to Ignore Right Now

Investors worried about the sell-off due to trade tensions might want to secure their investment capital by investing in these…

Read more »

Piggy bank with word TFSA for tax-free savings accounts.
Dividend Stocks

Transform Your TFSA Into a Tax-Free Monthly Income Machine ($193 a Month!)

These TSX dividend stocks offer high yields and monthly payouts. You can earn over $193 in tax-free income per month.

Read more »

The TFSA is a powerful savings vehicle for Canadians who are saving for retirement.
Dividend Stocks

TFSA: Invest $10,000 in This TSX Stock That Thrives During Market Volatility

This TSX stock isn't your typical investment, but that could be a major benefit for investors.

Read more »

customer uses bank ATM
Bank Stocks

A Forever Dividend Pick: 29.4% Upside in This Canadian Stock

A Canadian Big Bank is a top pick for investors looking for pension-like passive income.

Read more »

senior man smiles next to a light-filled window
Retirement

3 Mistakes That Can Reduce Your Retirement Income

Avoid common retirement mistakes that can impact your finances during market downturns. Learn essential strategies to protect your savings.

Read more »

GettyImages-1394663007
Dividend Stocks

8% Yield: 2 Stocks I’d Buy in April 2025

April had a bearish start because of Trump’s reciprocal tariffs. This dip created an opportunity to lock in an 8%…

Read more »