CLO gains from boosted pharma M&A may be curtailed amid drug pricing scrutiny; Valeant eyed

By Rebecca Melvin

New York, Nov. 19 – Gains that collateralized loan obligations have enjoyed due to boosted M&A in the generic and specialty pharmaceutical sector will likely be curtailed due to the scrutiny of drug pricing practices that Valeant Pharmaceuticals International Inc. and other drug companies are currently undergoing, according to a Moody’s Investors Service sector comment.

Valeant is a widely held credit in U.S. CLOs, and it has been especially active in M&A of companies and products in the past year. Other widely held acquisitive high-yield drug companies in U.S. CLOs include Endo Luxembourg Finance Co., Mallinckrodt International Finance SA, Akorn Inc., Horizon Pharma Inc. and Concordia Healthcare Corp., according to Moody’s.

As of Oct. 31, 683 U.S. CLOs rated by Moody’s had exposures to at least one of seven high-yield generic and specialty pharmaceutical companies prominent in recent years for favoring acquisitions, with total exposure exceeding $5.6 billion, according to the Moody’s comment, Side Effects of Pharma Price Scrutiny Will Stem CLO Gains from M&A Activity.

Valeant is the largest of these holdings: 653 CLOs own $3.2 billion of Valeant debt, or almost 30% of Valeant’s outstanding bank loans, according to Moody’s.

Standard & Poor’s says that Valeant is the largest issuer in 32 of the 528 post-crisis CLOs that S&P has rated. S&P analysts noted that total exposure of about $2.47 billion is 0.89% of the collateral in all its rated deals.

CLOs have benefited indirectly from these holdings through deleveraging in amortizing CLOs and low-risk par building reinvesting in CLOs.

CLOs benefited after transactions accelerated repayment of existing loans, and amortizing CLOs raised their credit by applying resulting prepayments to pay down liabilities, while reinvesting CLOs took advantage of opportunities to increase par over-collateralization by reinvestment prepayment proceeds into new issue or secondary market loans priced at small discounts to par.

But government and media scrutiny on generic and specialty drug companies will slow M&A going forward, following a spike in activity in the first half of the year, according to the Moody’s comment published Nov. 18.

The U.S. Department of Justice served Valeant and a number of other specialty pharmaceutical companies with subpoenas for information on price increases on certain products, and on Nov. 4, the U.S. Senate Special Committee on Aging also opened an investigation and requested that Valeant and a number of other drug companies provide drug pricing information.

CLO managers have been re-evaluating their holdings of Valeant in light of developments since October, when Citron Research published a disparaging report claiming that Valeant is involved in fraudulent activity through the creation of “phantom accounts” developed to deceive auditors and book revenue.

Valeant’s stock price fell to around $110.00 after the Citron report was published. That was down about 25% from the price of $147.00 before the news. On Thursday, Valeant shares bounced $11.40, or nearly 16%, to $84.00, but they are down 68% since highs notched in August.

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