It's crunch time for Concordia International Corp.
With the junk-rated Canadian drug maker facing two October interest payments, pressure is building for it to reach a debt-restructuring agreement with key bondholders. S&P Global Ratings downgraded Concordia on Sept. 18, citing its "unsustainable" capital structure and forecasting a "highly probable" likelihood of a restructuring or distressed exchange.
Concordia, weighed down with $3.7-billion (U.S.) of debt and already engaged in conversations with its creditors, finds itself in this predicament after a debt-fuelled acquisition spree. Now, it has one of two likely options, according to Geoff Castle, portfolio manager at Vancouver-based Penderfund Capital Management Ltd., which doesn't own the bonds.
"Either an exchange offer, where the bondholders will take a principal 'haircut,' or equitization," Mr. Castle said by phone, meaning they'll swap their old bonds for newer debt of less value, or see it converted into an ownership stake in the company.
Concordia has been exploring options to restructure its business to reduce its leverage ratio following its failed growth-by-acquisition strategy. Much of its troubles are tied to its largest deal: the $3.5-billion takeover of Britain's Amdipharm Mercury Ltd. agreed to in September, 2015, which left Concordia saddled with debt and a large exposure to Europe and fallout from Brexit. The company released a new strategic plan in early September after hiring Perella Weinberg Partners in June as a financial adviser.
Concordia declined to comment through spokesman Adam Peeler.
Trading in the company's unsecured bonds, which aren't backed by collateral and get paid after secured bonds, suggests there isn't a lot of value left in the equity, Mr. Castle said. While the company's first-lien April, 2022, bonds, with a coupon payment Oct. 1, are trading around 76 cents on the dollar, its April, 2023, unsecured bonds, with an Oct. 15 coupon payment, are down to about 18 cents.
The stock trades at around $1.50 (Canadian) in Toronto, down from more than $4 in February and from an all-time high of $110.60 in September, 2015.
To be sure, the company has enough cash and earnings to make the coupon payments due in October, as well as to sustain it for the next year, said Morris Borenstein, a Moody's Investors Service analyst who rates the company Caa3.
With a cash balance of around $300-million (U.S.), Concordia has some time to continue negotiations, said Arthur Wong, an analyst at S&P Global Ratings, who downgraded Concordia to triple-C minus.
"Those maturities are coming over the next several years, so it's not an immediate issue," he said. "But the clock is ticking." Concordia could also explore divestitures to raise cash and reduce leverage, which is nearly 11 times a measure of debt-to-earnings on an adjusted basis, Mr. Wong said. A ratio of nine times usually raises red flags, he said.
Mr. Borenstein said it's unlikely Concordia will be able to follow the example of its larger competitor, Valeant Pharmaceuticals International Inc., which managed to sell assets to reduce leverage and stabilize its business.
"Concordia would have a hard time finding asset sales that would really be able to fix their current problems," Mr. Borenstein said.
That leaves negotiations, according to Mr. Castle of Penderfund Capital. Which means bondholders may be in store for an autumn haircut.