Valeant falls on federal probe, oils off with crude; Fortescue gains on debt buyback, cost-cutting

By Paul Deckelman

New York, Oct. 15 – Valeant Pharmaceuticals International, Inc.’s bonds and shares plunged in heavy trading on Thursday on the news that the Canadian drug manufacturer – already facing congressional scrutiny over its controversial pricing policies for some of its medications – has been issued subpoenas by the United States Attorneys in New York and Boston who are also seeking details on its patient assistance programs, drug pricing and distribution practices.

Also on the downside were energy names such as California Resources Corp. and Energy XXI Ltd., which lost ground along with the latest slide in crude oil prices after data showed U.S. oil stockpiles growing.

Other losers in the sector included Penn Virginia Corp., Berry Petroleum Co. and Magnum Hunter Resources Corp.

Traders expected that Thursday’s late-session announcement of Advanced Micro Devices Inc.’s third-quarter slide into the red will pull its battered bonds down in Friday dealings.

On the upside, Fortescue Metals Group Ltd.’s bonds firmed smartly after the Australian iron ore producer reported continued progress in cutting its costs in the face of weak iron ore prices – and said that it had taken advantage of lower prices for its bonds to buy back a sizable chunk of its debt.

In the convertibles market, traders reported activity in foreign exchange services company FXCM Inc., whose paper fell after it reported weaker key customer trading metrics for September.

Valeant falls on federal probe

Valeant Pharmaceuticals’ bonds – which recently fell from levels around par and were gyrating around in the in the 90s after Congressional Democrats talked about issuing a subpoena to force the Montreal-based drug manufacturer to come before Congress to explain its pricing policies on some of its medications – were back on the slide on Thursday, pushed lower by the news that two federal prosecutors had issued subpoenas seeking information.

“They were down a couple of points in pretty active trading,” a trader said, quoting the company’s 6 1/8% notes due 2025 at 94½ bid.

“Last week, they were trading around 95, maybe as high as 96 or 97, so they’re drifting down.”

He also saw the company’s 5 7/8% notes due 2023 also ending at 94½, which he called “down a couple as well” from recent levels.

At another desk, a trader quoted the 6 1/8% notes going home at 94 13/16, calling that down 1 7/16 points on the session.

He said that over $86 million of those notes had changed hands, easily the busiest bonds in Junkbondland on Thursday.

He said that the 5 7/8s were also extremely busy, with over $48 million having traded. He saw them ending at 95 bid, down 1½ points on the day.

Another big loser was Valeant’s 6 3/8% notes due 2020, which fell 1¼ points on the day to end at 99¾ bid, on volume of over $16 million.

And its 5½% notes due 2023 were seen down a deuce on the day at 93 bid on turnover of more than $11 million.

The weakness carried through to the company’s New York Stock Exchange-traded shares, which dropped by $8.42, or 4.75%, to finish at $168.87, on volume of over 10.6 million shares, more than triple the norm.

The bonds and shares slid on the company’s revelation that it had received subpoenas seeking information on its pricing policies, patient-assistance programs and distribution practices from the U.S. Attorney’s offices in both the District of Massachusetts and the Southern District of New York. Valeant said it would cooperate with the prosecutors.

The company came under fire after it tripled the price of its heart drug Isuprel and raised the price for another heart medication, Nitropress, to six times what it had been, after buying the company that makes those remedies in February.

Valeant has been an aggressive acquirer of smaller pharmaceutical makers, but has raised eyebrows by instituting big price hikes on some of the medications it has acquired, while cutting money for research and development.

Senior analyst Vicki Bryan of the Gimme Credit independent investment advisory service said frankly in a research note on Thursday that “we have not been a fan” of Valeant’s business model – she rates it as an underperform – saying it was built around paying excessive multiples for companies and then making up for it by jacking up prices for the acquired medications, bringing official scrutiny down on the company, first in its native Canada and now in the United States.

Bryan speculated that Valeant may be forced by public pressure to rescind some of those price hikes across what she called “its bloated portfolio.”

But should that happen, she warned, “Valeant’s already troublingly high leverage would spike even higher on its massive debt load at the same time its ability to repay that debt becomes impaired and its book value becomes substantially overstated,” causing bondholders to head for the exits.

Oil issues head lower

Elsewhere, energy issues were seen on the slide on Thursday as crude oil prices remained under pressure. The benchmark West Texas Intermediate grade of domestic crude for November delivery settled at $46.38 per barrel, down 26 cents on the day, in trading on the New York Mercantile Exchange.

Not surprisingly, bellwether energy credit California Resources’ 6% notes due 2024 lost more than 1¼ points, finishing at 66 11/16 bid, a trader said, on volume of over $25 million.

The Los Angeles-based oil and natural gas exploration and production operator’s 5% notes due 2020 were likewise off at 71 bid, with more than $17 million having traded.

Hamilton, Bermuda-based Energy XXI’s 11% notes due 2020 lost ¾ point to end at 57¾ bid, with over $11 million traded.

A trader at another desk saw Penn Virginia’s 7¼% notes due 2019 down 1½ points on the day at 27½ bid.

Berry Petroleum’s 6¾% notes due 2020 finished at 37½ bid, while Magnum Hunter Resources’ 9¾% notes due 2020 closed at 42¼ bid, both down 1¼ points on the day.

AMD posts loss

Late in the session, a trader noted that Advanced Micro Devices had just reported poor third-quarter numbers, and speculated about whether this might pull the bonds lower on Friday.

He pointed out that the Sunnyvale, Calif.-based semiconductor maker’s 7½% notes were trading at 64 bid, while its 6¾% notes due 2019 were going out at 72 bid.

AMD lost $197 million during the third quarter, a sharp reversal from its year-earlier profit.

The 25 cents per share loss that it posted was wider than the roughly 10 or 11 cents per share that analysts had been expecting – although its $1.06 billion of revenues did beat expectations.

The company also announced plans for a joint venture with Chinese manufacturer NFME, with the sale of some AMD facilities expected to bring the company $371 million of much-needed cash.

Fortescue firms up

On the upside, favorable numbers turned out to be the catalyst behind a rise in Fortescue Metals Group’s bonds.

A trader said “Fortescue was very busy. They had their call this morning and the bonds popped,” although he added that they had softened a little from their peak levels later on, while still finishing considerably higher on the day.

Its 9¾% notes due 2022 still managed to post a handsome 3 point gain to 101 bid, with over $56 million of the notes having changed hands, one of the busiest bonds of the day.

FMG’s 6 7/8% notes due 2022 firmed several points to 72¾ with over $15 million traded.

The Australian iron ore producer said that it had managed to cut its operating costs in the face of weak prices for its output, bringing its cost down to $16.90 per ton – about half of what it was a year ago – and it expects to wring out further cost savings, driving its costs down to the $15 per ton level by year’s end.

Besides a leaner cost structure, Fortescue touted its debt-buyback program, which saw it take out $384 million of bonds in open-market transactions since June at an average cost of 80 cents on the dollar.

“If the market is going to price our debt at those levels, then we are going to buy it,” the company’s chief executive officer Nev Power declared.

FXCM converts busy

In the convertibles market, traders saw some action in FXCM’s 2.25% converts due 2018, and those bonds were a little lower at 67.5 with the underlying shares of the New York-based foreign exchange services company better by 2% at $10.23 at the close.

FXCM reported weaker key customer trading metrics for September for its retail and institutional foreign exchange business on Tuesday. Retail trading volume was down 1% from August and down 10% from September a year ago. Institutional trading volume was flat from August and down 44% from September 2014.

-Rebecca Melvin contributed to this review

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