November 8, 2016 / 7:53 PM / 2 years ago

UPDATE 1-Valeant junk bonds drop on earnings warning

(ADDS Moody’s downgrade, investor quotes)

By Natalie Harrison and Davide Scigliuzzo

NEW YORK, Nov 8 (IFR) - High-yield bonds of Valeant Pharmaceuticals fell in heavy trading Tuesday after the company cut guidance for the year and warned that 2017 could be even more challenging.

Valeant’s bonds were among the heaviest traded US dollar junk bonds, according to MarketAxess data.

Its 6.125% 2025s fell over three points to as low as 75.438 on Tuesday morning, before recovering to 77.625 in the early afternoon, according to MarketAxess data.

Its 6.375% 2020s dropped over two points to as low as 86.688 before retracing half of those losses. The company’s US-listed stock tumbled more than 20% on the day.

Valeant said Tuesday some of its products could face new competition.

Nitropress and Isuprel are among Valeant’s neurology drugs that lose market exclusivity by next year, and there is also likely to be a “material” drop-off in its generics business, said Chief Financial Officer Paul Herendeen, who started work in September.

On a conference call with analysts, Herendeen said the company has addressed the vast majority of unknowns, but cautioned that there could still be some “surprises” yet to be discovered - a warning sign for some investors.

“One would have thought management had plenty of time to take whatever hit they needed to take to right-size the business,” one high-yield bond investor told IFR.

“That has put the fear of God into a lot of investors.”

Moody’s on Tuesday downgraded Valeant’s corporate rating by one notch to B3 and pushed the company’s senior unsecured bonds into Triple C territory for the first time ever at Caa1.

It said the move was justified by the challenges Valeant has faced in turning around its specialty pharmaceutical business and by the company’s elevated financial leverage, which Moody’s expects to remain above seven times through 2017.

Valeant bonds had rallied last week on hopes proceeds from a potential sale of its Salix stomach-drug unit would help lower the US$30bn debt load the company has accumulated over the years to pursue ambitious acquisitions. (Reporting by Natalie Harrison and Davide Scigliuzzo; Editing by Marc Carnegie)

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