On last week’s third-quarter earnings call, interim Teva CFO Mike McClellan told investors that executives would be “evaluating all options” for easing the company’s debt burden. But that list of options is shrinking.
Monday, credit rating agency Fitch took Teva's rating down two pegs to junk status, citing “significant operational stress” for the company. The ratings apply to approximately $34.7 billion of debt as of Sept. 30, 2017.
The move could add to Teva's borrowing costs and "force some more people to sell," as Bastian Gries, head of investment-grade credit at Oddo BHF Asset Management GmbH, told Bloomberg.
“The two-notch downgrade by Fitch is harsher than expected,” he added.
Fitch, though, pointed to "pricing pressure in Teva's North American generics segment and erosion of sales of Copaxone" that would "continue to weigh on free cash flow in the near term, requiring the company to continue to sell assets or find external capital resources to meet debt obligations in 2018 and 2019 and beyond."
Teva’s well aware of both those issues, which last week forced it to slash its 2017 guidance for the third time. And it’ll be up to brand new CEO Kåre Schultz, who took the reins last week, to right the ship.
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As Fitch notes, Schultz still does have a couple options for digging Teva out of the hole left by a disastrous $40.5 billion purchase of Allergan’s generics unit. Reducing costs is one, though the company has already revealed a restructuring that’ll claim 7,000 jobs. Paring down its dividend—again, a measure Teva’s already taken—is another. Asset sales proceeds, such as the $1 billion-plus the Israeli drugmaker recently drummed up with a sale of Paragard to CooperSurgical, will also help, Fitch noted.
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And then, there’s the potential relief Teva could score if billionaire Len Blavatnik decides to pick up a stake in the struggling pharma. Israeli newspapers have said Blavatnik was eying an investment of up to $3 billion, with talks currently in the initial stages.