If a stock is under pressure, I’m interested. I never jump as quickly as into the story as some other authors here, but I’ll happily purchase anything at the right price. I’ve been intermittently watching the long, slow side at Teva Pharmaceutical (TEVA) for years now, and it is high time I threw a little analysis into the ring here as retail investor interest in the firm has certainly picked up. While I can see why certain cases are made for the firm as a deep value play, I think bulls have one last issue to deal with – an eventual cut of the company’s debt from investment grade. Once that comes to fruition – likely early 2018 – shares will likely be at levels more palatable. Until then, buyers have likely been way too early.
Why A Downgrade Is Likely, And Why It Matters
Debt downgrades are never pleasant, but in practice, they don’t necessarily result in meaningful changes in yields on corporate debt (which ties into eventual refinance cost). Despite the massive pain Teva has undergone recently, debt costs haven’t moved that materially. As a point of reference, the main proxy I would use here is Teva’s $3,500mm senior notes issuance that matures in 2026, cusip 88167AAE1. Yield at offering was 3.18%, but the bonds now trade at a 4.5% yield to maturity. That’s a clear indication that borrowing costs have moved up materially, and that if Teva had to refinance all of the debt used to buy Allergan Generics, the interest burden would have moved higher. However, there are plenty of (much healthier in my opinion) small and mid caps that wish they could fund senior unsecured debt at the prices Teva debt currently trades.
