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Bausch Health: Initiates Exchange Offers
Eric Axon, CFA - Co-Head of US High Yield Research / Senior Healthcare Analyst
Patrick Cunniff - Healthcare Analyst
EXECUTIVE SUMMARY
- Bausch Health launched an exchange offer for all series of senior unsecured notes for up to $4 bn of new secured notes. The exchange offer includes a combination of 1L and 2L notes, each issued by BHC. It also includes a slug of senior secured notes issued by the Holdco Issuer, the unrestricted subsidiary which now owns 38.6% of BLCO equity.
- BHC intends to capitalize on the deeply distressed trading levels of its senior notes. Doing so would allow for material, one-time leverage reduction, and perhaps even interest cost savings. This, in turn, could help BHC achieve the <7.6x RemainCo Total Leverage and >2.0x Fixed Charge Coverage ratios required for the BLCO separation.
- In this note, we provide initial thoughts on the exchange offer with a focus on exchange consideration, participation levels, valuation, and implications for BHC’s financial metrics.
Relative Value
For the secured notes, we estimate that $2.5 bn of additional 1L secured debt would result in recoveries of ~80-90% (versus full recoveries absent additional secured layering). This estimate relies upon our DCF analysis, which values BHC (post B+L separation and in the context of the Xifaxan LOE) at $8.2-9.3 bn. Our recovery estimates sit in-line with, or modestly above, current trading levels on BHC’s senior secured notes. We would highlight that the exchange offer will likely exhaust BHC’s incremental secured capacity, with the new Credit Agreement representing the restrictive document in this respect. This should limit the potential for additional secured dilution in the future.
For the unsecured notes, the exchange offer presents two choices in our view… participate in the exchange or sell in the secondary market. As detailed below, the value being offered to unsecured noteholders via the exchange will heavily depend on the post-transaction market value of the new secured notes. We estimate post-transaction market values for the new secured notes of: (i) $84-92 for the new 1Ls, (ii) $55-69 for the new 2Ls, and (iii) $90-100 for the Intermediate Holdco notes. These estimates assume full participation levels. Please see the body of the piece for a more detailed explanation of our methodology.
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