Valeant results beat, bonds firm; Endo earnings better, but forecasts lowered; Depomed convertibles tank

By Stephanie N. Rotondo

Seattle, Aug. 8 – Earnings were the focus of the distressed debt market on Tuesday, as Valeant Pharmaceuticals International Inc. and Endo International plc released results.

Valeant reported better-than-expected results for the quarter, but it also cut revenue guidance for the year. Still, its bonds were “up kind of smartly,” a trader said.

As for Endo, it also beat expectations but lowered its full-year guidance.

Like Valeant, its debt also gained ground.

Over in the distressed convertible bond arena, Depomed Inc. paper was actively traded during the session, also in the wake of results.

While the figures didn’t beat expectations, they were at least in line. But the company’s 2.5% convertible notes due 2021 got hammered nonetheless.

In the oil and gas space, Denbury Resources Inc. came out with numbers that surpassed analysts’ expectations. However, its debt was “a little mixed,” according to a trader.

California Resources Corp.’s 8% second-lien notes due 2022 were meantime “down again,” a trader said, seeing the paper falling 1½ points to 58¼.

Another market source called the bonds down 2¼ points at 59¼ bid.

For its part, domestic crude oil prices were a touch lower on the day, as production reports from OPEC showed higher-than-expected output.

Valeant results improve

Valeant Pharmaceuticals’ debt got a boost on Tuesday after the company reported earnings that beat expectations.

A trader saw the 6 1/8% notes due 2025 adding a deuce to close at 86, while the 5 7/8% notes due 2023 firmed 2¼ points to 87½.

For the quarter, Valeant posted adjusted earnings per share of $1.05 on revenue of $2.23 billion.

Analysts polled by Thomson Reuters had forecast adjusted EPS of 94 cents. Revenue came in line with expectations.

The company said its better-than-expected results were due in large part to strong sales of Xifaxan, an irritable bowel drug.

Valeant also noted that it was on track to meet – and possibly surpass – its goal of cutting $5 billion in debt by February 2018.

But the news was not all good: Valeant did lower its yearly revenue expectations, though it kept adjusted EPS and EBITDA forecasts unchanged.

For the year, Valeant expects revenues of $8.7 billion to $8.9 billion. That compares to previous forecasts of $8.9 billion to $9.1 billion.

Endo earnings beat

Endo International also came out with earnings on Tuesday and, like Valeant, the numbers were better than expected.

As such, a trader said the company’s 6% notes due 2025 firmed 2½ points to 84.

For the quarter, Endo reported adjusted EPS of 93 cents, better than the 73 cents analysts polled by Thomson Reuters had expected.

But as pressures on generic drugs mount, the company also lowered its revenue and adjusted profit from continuing operations forecasts.

For the year, Endo is projecting revenue of $3.38 billion to $3.53 million. The company had previously guided revenue between $3.45 billion and $3.6 billion.

As for the adjusted profit, its full-year forecast was cut to $3.35 to $3.65 a share from $3.45 to $3.75 a share previously.

Depomed dives

Depomed’s 2.5% convertible were “taking it in the throat,” a trader said Tuesday after the company reported earnings.

The trader saw the paper trading “either side” of 73.5, which was a loss of about 10 points on the day.

The underlying equity was also under pressure, dropping $3.085, or 33.42%, to $6.145.

For the second quarter, the Newark, Calif.-based pharmaceutical company posted a loss of $26.7 million, or 43 cents per share.

On an adjusted basis, earnings per share came to 8 cents. That was in line with the consensuses estimate given by Zacks Investment Research.

Revenue was meantime in line with the company’s expectations at $100.5 million.

However, the company noted the challenging market it is in, given its presence in the opioid market.

“We continue to operate in an environment that is challenging and rapidly evolving,” said Arthur Higgins, president and chief executive officer of Depomed, in the earnings release. “The increasing public focus on opioids as well as opioid manufacturers, including by government agencies and other industry stakeholders, will continue to disrupt the opioid markets.

“While our flagship NUCYNTA franchise continues to outperform the long and short-acting markets, it is clearly not immune to these developments,” he added.

One trader likened what was going on in the opioid space to what happened to the tobacco industry and in regards to asbestos once both were deemed potentially unsafe.

“It’s a national problem,” the trader said, noting that investors might be hesitant to climb onboard with a company that could face legal issues in the future.

“If it’s just one part of your business, that’s one thing,” he said of Depomed’s opioid portfolio. “But this is a large part of their business.”

In fact, the company acknowledged those headwinds, which resulted in a downward revision of yearly guidance.

Depomed reduced its revenue forecast to $395 million to $405 million, which compared to previous guidance of $405 million to $425 million.

Fannie wobbles

Fannie Mae’s 8.25% series S fixed-to-floating rate noncumulative preferreds (OTCBB: FNMAS) were initially weaker, but ended the day a touch higher.

The preferreds closed at $7.05, up 3 cents. The issue was off 8 cents, or 1.14%, at $6.94 at mid-morning.

Fannie’s variable rate series P noncumulative preferreds (OTCBB: FNMAH) were also busy, but unchanged at $5.50.

On Monday, the agency’s stress test results were released, showing that the company – as well as its sector peer Freddie Mac – had failed.

As it stands right now, Fannie and Freddie have a combined capital buffer of $600 million – a figure that, under the current conservatorship terms, will be reduced to zero in 2018. Though both agencies have been profitable in the last couple of years, the so-called “net worth sweep” requires that a bulk of the GSEs’ profits be put back to the Treasury by way of a dividend payment.

In the wake of the tests, however, those who have been pushing for the GSEs’ ability to build up more capital – mostly investors, although there are a few political allies as well – may use the data to back up their arguments.

Back in May, the FHFA head, Mel Watt, even noted to Congress that the current capital plan is not sustainable and indicated he may be open to building up a larger capital cushion.

But so far, housing finance reform has stalled and either side – those fighting for Fannie and Freddie to recapitalize and those looking to unwind both firms – have been moved to compromise only so far.

© 2015 Prospect News.
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