Teva teeters on junk rating as sell off in bonds accelerates

Teva Pharmaceutical Industries Ltd. is teetering on the edge of a junk rating amid its biggest bond sell-off on record.

Moody's Investors Service downgraded the drugmaker's debt to one step above junk on Thursday and warned that the company's ratings may be pressured lower over the next 12 to 18 months. Earlier in the day, Teva slashed its profit forecast for the year, cut its dividend and warned bond investors that it risked breaching debt covenants.

The drugmaker's dollar notes due October 2026 fell to the lowest since March and the largest decline since the bonds were sold. The Petach Tikva, Israel-based company's euro bonds due October 2028 dropped to the lowest on record.

Moody's now ranks Teva's debt at Baa3, the lowest investment grade, while S&P Global Ratings reaffirmed the drugmaker's rating a level higher at BBB on Thursday.

The world's biggest maker of generic drugs may have to renegotiate and amend some debt covenants if cash flow worsens or proceeds from asset sales are lower than expected, Michael McClellan, interim chief financial officer, said on a conference call Thursday with analysts. The warning came as the company pared its profit forecast for a second time this year and slashed its dividend by 75 percent.

"The covenant issue comes on top of a worse-than-expected deterioration in results," said Bastian Gries, head of investment grade credit at ODDO BHF Asset Management GmbH which manages about 100 billion euros ($117 billion) of assets. "The headroom is clearly shrinking further with the profit warning."

Holders of Teva's $35 billion of debt are concerned the drugmaker risks a covenant breach after last year's ill-timed $40.5 billion acquisition of an Allergan Plc division and a squeeze on profit margins because of a drop in generic drug prices. The company is planning to sell its global women's health and European cancer and pain-treatment divisions after saying earlier this year it would off-load assets to avoid a ratings downgrade to near-junk levels.

Teva's 3.15 percent bonds due 2026 dropped as much as 2.9 cents on the dollar to about 91 cents on Friday, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. Its 1.625 percent euro bonds due 2028 fell as much as 3 cents to around 89 cents, prices compiled by Bloomberg show.

The company's net debt has risen to 4.56 times its earnings before interest, tax, depreciation and amortization from 4.49 in the first quarter. McClellan said Teva's covenants require a ratio of 4.25 at the end of the year, which the company expects to meet.

Teva's results "renewed fears about their ability to execute a reduction in leverage within the time frame set by the rating agencies and the current covenant timeline," said Russell Vincett, a London-based credit analyst at BlueBay Asset Management, which oversees more than $52 billion of assets.