As Teva's share price falls, its bond yields rise

Kare Schultz Photo: Shlomi Yosef

Leader Capital Markets: A debt arrangement could happen if all the negative scenarios for Teva materialize at once.

While Teva Pharmaceutical Industries Ltd. (NYSE: TEVA; TASE: TEVA) share price is reaching a new low point every week, the prices of its bonds are also declining, due to serious concern in the market about the Israeli company's exposure to major legal risks: lawsuits concerning the marketing of opioid painkillers and price-fixing in the generic drug market. Teva's bonds, which have a junk bond rating, are trading at yields as high as 9%. The bonds with the highest yields are the $1.3 billion series due for repayment in 2027. The largest bond series, amounting to $3.5 billion, which falls due in 2026, is trading at an 8% yield.

The payment date for one of Teva's bond series fell last week. The company paid $1.6 billion from its store of cash. Teva's debt is still very high: $28.6 billion gross and $26.7 billion net as of the end of the first quarter. In the coming years, Teva will have to go to the market and try to raise new debt in order to reschedule its debt. In the current situation, the conditions for raising more money are far from ideal, which merely increases the anxiety.

"The pricing and high yields of Teva's bonds reflect concern by investors about possible damage to its cash flow," says Sabina Levy, manager of Leader Capital Markets' research division. "It is no secret that Teva is in a challenging period, and that its leverage is high. The company itself said that it would have to reschedule debt before 2021. If we look at the coming years, there are points at which Teva will probably have to reschedule debt: in 2021 and in 2023. The concern, of course, is a result of uncertainty about the damages that Teva will have to pay in its court cases, which are liable to affect its cash flow and its ability to pay its debts. These factors come on top of a challenging business environment in the US, the fall in Teva's revenue from Copaxone, and the absence of growth engines.

"It's a question of the chicken and the egg. Because of its high leverage, Teva's ability to create new growth engines through acquisitions or additional investments in R&D is limited, and there is nothing that can substantially improve its cash flow. On the other hand, the threat of the two legal proceedings is looming, and no one knows where they will end," Levy concludes.

"Globes": Will Teva be able to reschedule its debt as planned?

Levy: "It will have to reschedule. There is a benchmark in the market, because the bonds are marketable, so it cannot get too far away from the interested derived from the marketable bonds. It is clear to everyone that Teva will have to raise capital, but at the current time, its chances of reaching the market in the short term are not good.

"There are three reasons for this. The first is the bond prices, which reflect investors' growing concern about exposure to lawsuits. It is believed that when the picture becomes clearer shortly before the opioids trial begins in Ohio in October, we will be better able to assess the potential exposure. That will give the market more confidence, and possible improve its attitude.

"The second reason is there may be a game here, because if Teva comes to the trial in a precarious financial state, a multi-billion dollar fine is liable to make it collapse, and the US legal system does not like making pharma companies collapse. It is therefore possible that this is not the best timing for rescheduling debt. The third reason that should be kept in mind is that companies have alternatives to straight bonds for raising money, including hybrid instruments."

What about raising capital? It is true that Kare Schultz said more than once that this would not happen, and that the share is at a low point, but maybe they will have no choice.

"To the best of my knowledge, a financing round is not on the agenda right now, both because of the share price and because of assessments concerning demand in the market for the share. Furthermore, if Teva comes to the market and says that it wants to raise capital in order to improve its balance sheet and alleviate anxiety, it is liable to give the market the impression that it is preparing to pay billions on its lawsuits."

Levy believes that all of these factors make a financing round in the near future unlikely, although Teva will have to raise debt - possible in one measure before 2021, or in two measures by 2023, in which it raises $1.5-3 billion, or possibly even more.

Is there any scenario whatsoever under which Teva will have to reach a debt arrangement? To talk with the bondholders about a change in the duration of the bonds, for example?

"This is theoretically possible, but for this to really happen, we have to assume that all of the possible negative scenarios materialize, and that is an extreme scenario right now. There are alternatives that can be tried; I do not think that this is on the agenda."

Meanwhile, Teva's share price began the week on Wall Street yesterday by falling 2.78% to $7.69, giving a market cap of $8.4 billion but the share price opened up 1.56% today. Last week the share price lost 14.5% and it is down nearly 90% since its peak in 2015.

Published by Globes, Israel business news - en.globes.co.il - on July 23, 2019

© Copyright of Globes Publisher Itonut (1983) Ltd. 2019

Kare Schultz Photo: Shlomi Yosef
Kare Schultz Photo: Shlomi Yosef
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