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Valeant Pharmaceuticals Intl Inc.’s Recent Debt Offering a Genius Move

Oftentimes, it is when a CEO’s back is against the wall that a company really does its best fighting.

This appears to be the case for Valeant Pharmaceuticals Intl Inc. (TSX:VRX)(NYSE:VRX) and CEO Joseph Papa, a man on a mission to not only save the once-dominant pharmaceuticals juggernaut but create a bigger and better cash flow machine less hindered by long-term debt.

With Valeant still mired by years of heavy debt creation related to high-priced acquisitions in the name of growth, many of which turned out very poorly, paying back debt has been Mr. Papa’s chief concern of late. His aggressive goal of eliminating $5 billion of debt by February 2018 has not only been achieved, but exceeded, with the company repaying approximately $6 billion in debt since Mr. Papa got on board.

Let’s look at how Valeant’s debt situation shapes up for investors who are concerned about the company’s ability to make its bond payments in the years to come:

Year Debt Due
2017 $0
2018 $0
2019 $0
2020 $4.4 billion
2021 $3.2 billion
2022 $6.6 billion
2023 $6 billion
2024+ $6.3 billion
Total $26.4 billion

While this debt load looks to be absolutely massive (and it is), shareholders should remember that not too long ago, the number staring investors in the face was $32 billion, with little indication that a road to profitability was even feasible given the state of affairs at the time.

This past week, Valeant announced it would be refinancing $1.5 billion of near-term debt that’s set to come due in 2020-2025, reducing the debt load due in 2020 to less than $3 billion, buying the company more time to pay down debt without selling assets needed to generate the free cash flow necessary to make the company’s debt payments in three years.

Additionally, while the 2020 secured notes (at 7%, 6.375%, and 5.375% interest rates) will be paid down with 9% debt, the $1.5 billion in debt the company was able to raise at 9% is unsecured debt, meaning not only will Valeant be able to refinance its debt for five years down the road, but it will free up assets that may have otherwise been used as security for the 2020 secured notes.

The question of whether or not this is the last deal the company will do to refinance its debt further down the road remains; however, the market has cheered this announcement, with the company’s share price increasing more than 10% this past week on the news.

The ability of Mr. Papa to create value from a very difficult position should be viewed by the market as a huge positive for the company. As I’ve said before, Valeant’s biggest asset is the strength of its management team, and I believe in this company as an excellent contrarian play in the years to come (remember my article calling for 50% upside in Valeant stock on May 10 when the stock price was trading at the $12 level?).

Stay Foolish, my friends.

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Tom Gardner owns shares of Valeant Pharmaceuticals. The Motley Fool owns shares of Valeant Pharmaceuticals.

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