Article/Intelligence
Elevated Valuation for Bausch + Lomb Would Give Bausch Health Flexibility to Prioritize Delevering or Shareholder Returns
- As Bausch Health explores refinancing options to facilitate a spinoff of its 88% stake in Bausch + Lomb, reports also indicate Bausch + Lomb is evaluating options to sell itself, potentially to private equity buyers at a premium valuation. These two goals appear in tension, as, in our opinion, the specter of fraudulent conveyance would make it challenging to spin off Bausch + Lomb to shareholders, while any proceeds from a Bausch + Lomb share sale would arguably need to remain within the company to repay debt rather than flowing to shareholders, if the company was not obviously solvent.
- If the Bausch + Lomb stake can be monetized at some of the reported potential premium valuations circulating in the market, such a sale could facilitate a meaningful deleveraging at Bausch Health, potentially removing the company from the zone of insolvency, particularly with the Valeant securities fraud litigation potentially approaching a global resolution. We estimate that if proceeds are all used to pay down debt, leverage would fall to 2.9x from 6.1x, based on 2024 EBITDA guidance. If proceeds are used to pay down the debt through 2026 to give the company 27 months of runway, we estimate that leverage would fall to 4.9x based on those same results.
- In our view, the cooperative dynamics at Bausch Health are intriguing as it is challenging to envision a restructuring, either in or out of court, palatable to all creditor classes, given the vast divergence in trading prices, seniority and tenure.
The table below shows leverage based on both the company’s guidance for 2024 EBITDA excluding Bausch + Lomb, as well as an estimate of Bausch Health EBITDA excluding both Bausch + Lomb and Xifaxan. If all Bausch + Lomb sales proceeds in excess of those needed to pay off the debt secured by the B+L stake, are distributed to equity, debt would fall to $14.7 billion with 6.1x leverage that rises to 12.4x excluding Xifaxan. If just the 9% holdco notes as well as the 2025 and 2026 maturities are repaid, then debt would fall to $11.9 billion, which is 4.9x leverage based on 2024 expected EBITDA or about 10.0x excluding Xifaxan. If all sales proceeds were used for delevering, total debt would fall to under $7 billion, assuming par repurchases, and leverage would fall below 3x inclusive of Xifaxan or under 6x excluding Xifaxan. Leverage and debt could fall even further if debt was purchased at a discount.
Based on our covenant analysis, Bausch retains a fair amount of flexibility as to what it can do with the sales proceeds because the Bausch + Lomb shares reside in an unrestricted subsidiary. As a result, it is unclear whether the influx of cash would actually be deployed toward debt repayment, as management has consistently expressed its desire and intent to spin off Bausch + Lomb to shareholders, thus going around Bausch Health’s creditors.
Providing the sale proceeds from a sale of Bausch + Lomb shares to equityholders may incite fraudulent conveyance litigation, in our opinion, as Bausch Health’s solvency is less evident absent it receiving any value from Bausch + Lomb. That being said, the existing fraudulent transfer litigation brought by the Valeant securities fraud plaintiffs has been cited as an impediment to Bausch’s B+L spinoff ambitions and could be nullified if settlements are reached with the parties. The largest securities fraud case, brought by GMO Trust, was recently settled, potentially paving the way for a global settlement. A settlement for substantially less than the more than $4 billion in asserted damages could bring the entity closer to solvency while also removing the overhang of already existing litigation.
While existing bondholders would also likely challenge such a transfer in state court on fraudulent conveyance grounds, insolvency may be difficult to demonstrate given Bausch Health’s recent positive free cash flow, drug pipeline and ample current liquidity. Particularly if some of the proceeds are used to address the 2025 and 2026 maturities, Bausch could retain the latitude to distribute the remainder of the proceeds to its equityholders.
A valuation around $25 per share would also dramatically impact the solvency analysis, potentially leaving room for some amount to be distributed to equity. The $8.775 billion of funds Bausch Health would receive if a B+L share sale is completed at such a valuation would be sufficient to redeem the 9% holdo notes as well as all of Bausch Health’s 2025 and 2026 maturities while still creating almost $5 billion of additional liquidity available to the company.
With Bausch Health stock trading at $8.16 per share, implying a market cap of approximately $3 billion, any distribution of the funds in excess of the next two years of maturities could provide a very meaningful return to equity. The equity market does not appear to expect the approximately $5 billion of distributions estimated in the middle case shown above, much less the full distribution assumed in a scenario where the proceeds are only used to repay the 9% holdco notes.
Nevertheless, even in the scenario where only the holdco and debt maturing in the next two years are addressed, the capital structure becomes closer to sustainable – it would be levered less than 5x inclusive of Xifaxan, less than 10x excluding Xifaxan’s contributions – and after all the debt repayment the annual interest burden would only be around $930 million, allowing Bausch to potentially be free cash flow positive even after Xifaxan loses its exclusivity and the remaining company’s EBITDA drops to an estimated $1.2 billion or so, given the company’s relatively low taxes and capital expenditures.
Even if no maturities beyond 2026 are addressed and the remaining cash were to be distributed to shareholders, Bausch would have approximately $11.5 billion of net debt. With $418 million of existing cash, assuming Xifaxan’s patents remain in place and Bausch Health excluding Bausch and Lomb can continue to generate approximately $800 million of annual positive free cash flow in 2025 and 2026, consistent with its expectation for 2024, net debt at Bausch Health could be approximately $9.5 billion at the end of 2026. If Xifaxan is able to generate another $1 billion of free cash flow in 2027, consistent with Reorg’s estimates for current cash flow potential, this could come down to closer to $8.5 billion. This is only 36% above Reorg’s low-case valuations for Bausch Health’s Solta, International, Diversified and Salix, excluding Xifaxan businesses, of approximately $6.2 billion. Debt could be fully covered if the valuations are higher than the low case, cash generation remains higher than expected or less cash is distributed to Bausch Health shareholders, which seems likely as the market cap is meaningfully below the $5 billion distribution assumed in this example.
That being said, if Bausch + Lomb sale proceeds are lower than expected or if management is less concerned about opening itself to fraudulent conveyance arguments and is more aggressive in circumventing creditors to distribute Bausch + Lomb proceeds to shareholders, creditors could face meaningful impairment, particularly if Xifaxan cannot maintain its exclusivity through 2028.
Price Appreciation Throughout Bausch Complex
As the reports of a potential sale of Bausch + Lomb percolated through the market over the last couple of weeks, there has been a meaningful uptick in the company’s stock price. As the chart below shows, on Sept. 16, when reports first hit the market that Goldman Sachs was advising Bausch + Lomb on a sales process described as “likely” to attract interest from private equity investors, Bausch Health’s stock popped from $6.32 per share to $7 per share and continued to climb to $8.16 per share as of Oct. 18.
The Bausch + Lomb share price rally has been even more dramatic, jumping to $17.80 on Sept. 16, up from $15.55 per share on the previous trading day, and the upward momentum has continued, as the price was $20.59 per share as of Oct. 18.
There has also been a meaningful rally in Bausch Health’s debt. The largest trading price uplift has been in the longer dated unsecured bonds, potentially on the thesis that the company may use the Bausch + Lomb proceeds to buy this debt back above current trading prices, albeit still at a discount. The chart below depicts trading prices on specific dates prior to big news announcements. On March 26, Reorg reported that Apollo and Oaktree were considering LME proposals to Bausch, on May 2 the company released its first-quarter earnings and Reorg reported that a cooperative had gone effective, on July 24 the company denied speculation that it was considering a bankruptcy, and on Sept. 16 news outlets disclosed Goldman Sachs’ role in a potential Bausch + Lomb sale while Jefferies’ role in a potential Bausch Health refinancing emerged in media reports on Sept. 18. The following chart shows the trajectory of the 14% second lien notes due 2030 that have rallied from just under 60 cents in late March, to over 90 cents on the dollar today, with yields falling from over 30% to just 16%.
In our view, the cooperative dynamics are intriguing as it is challenging to envision a restructuring, either in or out of court, palatable to all creditor classes, given the vast divergence in trading prices, seniority and tenure. For example, the near-dated unsecured debt have consistently traded in the mid-90s, while long-dated unsecured debt was trading in the 40s earlier this year, despite its equal treatment in a bankruptcy scenario. A similar pattern was observed on the secured side, as long-dated secured debt traded down in the 50s, while the 2025 maturity traded in the mid-90s earlier this year. This would suggest that creditors expected the company would likely pursue an out-of-court transaction, potentially through the sale of its Bausch + Lomb stake, to address the near-term maturities while leaving longer-dated securities in place.
It is interesting to compare the price appreciations since the start of the year across the different instruments. The term loan is up almost 20% year to date, with longer-dated secured bonds rallying 25% or more. Most of this price appreciation occurred prior to the announcement of the Bausch + Lomb sale, as reports hit the market regarding the formation of the cooperative group and its potential discussions with the company.
The unsecured debt, on the other hand, has also traded up meaningfully, with bond prices up between 20% and 50% year to date, with over half the movement occurring through the summer as the cooperative was reported to negotiate with the company, followed by another more than 10-point trading price appreciation since the Bausch + Lomb sale headlines. This could suggest the holders of these longer-dated bonds are increasingly optimistic that the company may receive more value than previously expected on account of its Bausch + Lomb holdings. It also may mean they have increased their belief in the potential for the holdings to be used to delever through the repurchase of longer-dated, more heavily discounted debt.