April 8, 2016 1:28 p.m. ET
When Valeant said Thursday that it had gotten lenders to give it more time to file its annual report, staving off a potential default, the company also said lenders agreed to relax its interest-coverage covenant. Beforehand, Valeant had to generate earnings before interest, taxes, depreciation and amortization, or Ebitda, of at least three times interest costs for the previous 12 months, starting in the current second quarter. The deal relaxes that to 2.75 times, according to people familiar with the matter.
In other words, Valeant can now generate less Ebitda and still meet the target. But Valeant didn’t appear to be in danger of falling below the three-times level anyway. The company has said its 2015 Ebitda was 3.3 times interest costs. So why did it want that extra wiggle room?
It could simply be prudence. More room to maneuver is no bad thing, especially given the company’s recent turmoil and $30 billion-plus debt mountain.
More concerning: It possibly signals Valeant isn’t fully confident in its own earnings guidance. Or it could show that while the company may expect to meet its guidance, 2016 earnings will be tilted toward the latter part of the year, meaning near-term Ebitda won’t be good.
In fact, Valeant has admitted as much, sort of, in terms of both Ebitda and earnings per share. It has said the latter, on an adjusted basis, will be only $1.30 to $1.55 in the first quarter, disproportionately low versus full-year guidance of $9.50 to $10.50.
Investors may be celebrating that default is no longer a pressing issue. But this is a reminder the company’s crisis will take a toll on operations—and profits.
Write to Michael Rapoport at [email protected]