Following one of the toughest years in its history, Teva Pharmaceutical Industries Ltd. (NYSE: TEVA; TASE: TEVA) managed to slightly reduce the pressure from its large debt towards the end of the year.
Teva reported revisions in its loan agreements with the banks. It must now maintain a maximum ratio of debt to EBITDA of 5 at the end of the current year, instead of the previous maximum of 4.25.
When it published its second quarter results, Teva warned of the possibility that it would fail to comply with the required financial covenants stipulated in its agreements. The warning led international rating agencies Moody's and Fitch to downgrade Teva's debt to one level higher than junk bonds. In order to obtain the financing it needs to comply with the covenants, Teva sold assets that were not part of its core business, while at the same time conducting talks with its creditor banks, culminating in last week's agreements. Teva's debt totaled $35.1 billion as of the end of the second quarter. $10.9 billion of this debt is included in the current agreements: a $5 billion dollar loan, a $1.4 billion loan in Japanese yen, and a renewable $4.5 billion line of credit. The revisions of the bank credit arrangements were supported by lenders holding 98% of all the loans and credit undertakings in the framework of the five bank credit arrangements.
The new agreements state that Teva will have to meet a maximum ratio of debt to EBITDA of 5 from the end of the third quarter of 2017 until the end of 2018. The maximum ratio will then fall to 4.75 until mid-2019, 4.5 until the end of 2019, 4.25 until mid-2020, and 3.5 starting at the end of 2020, as was previously required from Teva.
The revisions include other conditions, such as an increase in the spread and the fee for the agreement for the renewal of Teva' s line of credit if Teva's credit rating is downgraded (if the rating is downgraded, Teva's bonds will be rated as junk bonds), as well as an unspecified charge for the revisions in the agreement.
"We are glad to announce the revisions in the company's bank loan agreements, which reflect strong support that we are receiving from the group of our lending banks," said Teva interim CFO Michael McClelllan. "These revisions are an important part of the company's plan for achieving financial flexibility and managing its capital structure."
McClellan replaced Eyal Deshe, who left Teva three months ago. Teva is being managed by interim CEO Yitzhak Peterburg until the arrival of Kare Schultz, and a temporary CFO.
Analysts: Less risk of another credit downgrade
"The revision adds the necessary flexibility for the next two years, when the company will face competition for Copaxone and limited visibility concerning the timing and pricing of generics launches," writes Goldman-Sachs analyst Jami Rubin. He believes that Teva's efforts to reduce its leverage are likely to be received favorably by the credit rating agencies, which will lower the risk of another credit downgrade.
Evercore Investment Banking analyst Umer Raffat believes that the revisions of the agreements give Teva a fairly good safety cushion. He writes that the company's debt is likely to drop to $31-32 billion this year, following the sale of women's health assets and $1-2 billion in cash flow from activity. Raffat adds that in order to achieve a 5 ratio of debt to BITDA, Teva will need $6.2-6.4 billion in EBITDA, while the company's revised forecast is $7.2-7.4 billion. Teva's current market cap is $17.5 billion, following a 44.7% drop in the company's share price since early August, but is now 11.6% higher than the low point it reached in early September.
Published by Globes [online], Israel Business News - www.globes-online.com - on September 24, 2017
© Copyright of Globes Publisher Itonut (1983) Ltd. 2017