Valeant Pharmaceuticals, which has come under pressure for both its accounting and business practices, is the single largest holding in U.S. collateralized loan obligations, according to Deutsche Bank.
In a report published Wednesday, the bank said that U.S. CLOs have aggregate exposure of over $3 billion to Valeant loans, and this debt is very widely held across CLOs.
Over the past week, there has been significant controversy over the nature of Valeant’s relationship with Philidor, a company that helps patients fill prescriptions for some of Valeant’s drugs
More broadly, Valeant has been under pressure to show it can run a business and grow organically, rather than just through acquisitions. On Tuesday, Standard & Poor’s revised its outlook on the company.
Whether or not the concerns prove material to the firm and its debt, the loan market has turned negative on the company over the last few days. As recently as mid-September, the average price of the company’s loan facilities held by CLOs was above par, but in recent days has fallen below 95 cents on the dollar.
By comparison, the average price of all healthcare and pharmaceutical company loans held by CLOs is roughly 96.5 cents on the dollar, and the average price of all loans held by CLOs is closer to 96 cents on the dollar.
CLOs have more to worry about than just deteriorating credit quality of their holdings; they are also facing higher funding costs.
A total of 10 CLOs have been issue for October to date, for a total volume to $4.9 billion with a couple of days left of the month, according to Deutsche Bank. It noted that this is in line with the slow pace of issuance in recent months. “Liability costs have been rising significantly, particularly at the junior mezzanine levels,” the report states.
“The AAA spreads on most of the deals getting done has been around 150 basis points over LIBOR, but deals have also priced at significantly wider levels. And that leaves out the deals not getting done due to spreads too high to make the deal work.”