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

Nuclear power station cooling tower
Energy Stocks

Why Shares of Cameco Are Powering Higher

Cameco (TSX:CCO) shares have surged more than 400% in the last five years alone, with more growth on the way.

Read more »

A bull outlined against a field
Stocks for Beginners

Bull Market Buys: 2 TSX Stocks to Own for the Long Run

Are you looking for stocks that could see a bull run for decades ahead? Here are two top TSX stocks…

Read more »

financial freedom sign
Dividend Stocks

Million-Dollar TFSA: 1 Way to Achieve to 7-Figure Wealth

Achieving seven-figure TFSA wealth is doable with two large-cap, high-yield dividend stocks.

Read more »

analyze data
Dividend Stocks

How Much Will Manulife Financial Pay in Dividends This Year?

Manulife stock's dividend should be safe and the stock appears to be fairly valued.

Read more »

food restaurants
Dividend Stocks

Better Stock to Buy Now: Tim Hortons or Starbucks?

Starbucks and Restaurant Brands International are two blue-chip dividend stocks that trade at a discount to consensus price targets.

Read more »

Diggers and trucks in a coal mine
Metals and Mining Stocks

1 Canadian Mining Stock Worth a Long-Term Investment

Cameco (TSX:CCO) stock could be a great long-term investment for Canadian growth seekers.

Read more »

Pot stocks are a riskier investment
Investing

Could Investing $10,000 in Aurora Cannabis Stock Make You a Millionaire?

Let's dive into whether Aurora Cannabis (TSX:ACB) could be a potential millionaire-maker stock, or a dud, over the long term.

Read more »

stock analysis
Energy Stocks

Is Enbridge Stock a Good Buy in May 2024?

Boasting high-yielding dividends and a stable underlying business, Enbridge (TSX:ENB) might be a great buy for your self-directed investment portfolio…

Read more »