Allergan bonds gap out on news of Valeant bid

Tue Apr 22, 2014 1:03pm EDT
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By Danielle Robinson Allergan, the pharma giant behind Botox, saw its bonds plunge some 10 points Tuesday on news that activist investor William Ackman is leading an attempted hostile takeover of the company.

Investors said that even an ultimately positive takeover would crush Allergan's A3/A+ investment-grade credit rating, and quickly jumped to market to sell off its paper.

The 2023s plummeted to US$84.58 in the secondary market, where they were quoted at 225bp bid/175bp offer over Treasuries - sharply off US$94.53 and an 80/70 bid/ask on Monday.

The company's outstanding 2.8% 2023 bonds have no change of control of language, investors said, leaving the outstanding notes open to the potential of being structurally subordinated to new acquisition debt, and a rapid tumble into junk-bond status.

"Investors are piling out of these bonds because they are looking at a situation that would lead to a downgrade of Allergan from the single-A category by the agencies to a triple-B rating in optimistic scenarios," Julie Stralow, credit analyst at Morningstar, told IFR.

Ackman's Pershing Square Capital Management, which currently holds 9.7% of Allergan, has teamed up with Canada's Valeant Pharmaceuticals International to mount the takeover bid.

"Never mind what the deal structure might look like going forward or even that it could ultimately be positive for Allergan," one bond investor said.

"You are sitting on a single A credit that could go down to single B or double B, and whenever Ackman is involved there will be headline risk."