Deciphering the Debt of Concordia Healthcare Corp.

Concordia Healthcare Corp (TSX:CXR)(NASDAQ:CXRX) is experiencing tremendous growth, but what’s the cost? The company is swimming in long-term debt of US$3.3 billion. The debt burden has dragged down Concordia’s shares. That’s not the only thing. Today, because of this news, Concordia falls another 10%.

Even Mark Thompson, the founder, chairman and CEO of Concordia says, “Concordia has been the subject of an unrelenting and unscrupulous attack by a group of short sellers for several months. We will continue to monitor this situation and will act accordingly. However, we are extremely excited about the business we have built and the opportunity to deliver long-term shareholder value.”

Long-term investors may wish to investigate for a potential long term position. However, it is probably not the kind of stock new investors would like to hold because it’s one of the most volatile stocks on the market.

Overlooking its volatility, Concordia has been experiencing tremendous growth its two big acquisitions from 2015. The acquisitions of Covis and AMCo helped diversify Concordia’s product offering from 6 products to 200.

However, Concordia is faced with excessive long-term debt that weighs on its balance sheet. US$3.3 billion of it! This comes with hefty interest expenses.

Deciphering Concordia’s Debt

Term Loans (52% of long-term debt): Variable interest rate

At the end of 2015, Concordia had US$1.73 billion of term loans that mature on October 21, 2021 (essentially in 5 years and 7 months). They have variable interest rates and require fixed payments over the term to maturity. There are also mandatory repayments based on excess cash flow Concordia generates.

40.6% of these loans are in the currency of GBP, which adds the uncertainty of foreign exchange. Variable interest rates add another risk — when interest rates rise, Concordia will have to pay more interests.

Bridge Facilities (3.5% of long-term debt): 9.5-11.5% interest rate

The Bridge Facilities are a type of gap financing for Concordia to access short-term loans for meeting short-term liquidity requirements. $112.5M of the bridge loans has an interest rate of 9.5% for 2 years. If these loans are not repaid on or prior to October 21, 2017, the interest rate will increase to 11.5% and the lenders will have the right to convert the loans into a 5-year bond.

Another bridge loan of $22.5M carries a maturity of 2 years and an interest rate of 9.5%. Originally, the bridge loans were an aggregate of $180M, but Concordia repaid $45M in December.

October 2015 Senior Notes (23% of long-term debt): 9.5% interest rate

These senior notes mature on October 21, 2022, and bear an interest rate of 9.5% that’s paid semi-annually on June 15 and December 15 of each year. Before December 15, 2018, Concordia may redeem up to 35% of these notes.

7% Senior Notes (21.3% of long-term debt): 7% interest rate
In connection with the Covis Acquisition in April 2015, Concordia closed a private offering of $735 million of senior notes due 2023 that bear an interest rate of 7%, paid semi-annually on April 15 and October 15 of each year. There is no mandatory redemption or sinking fund payments with respect to these senior notes. However, by the end of 2015, Concordia still paid back 3.4% (US$25.2 million) of it.

Impact of Concordia’s Debt

At the end of 2015, Concordia’s long-term debt amounted to $3.32B, its debt-to-equity ratio was 2.87, its debt-to-asset ratio was 0.63 (end of 2014’s was 0.39), and its debt-to-capital ratio stands at 73%. Higher debt can lead to volatile earnings because of the increased interest expenses.

At the end of 2015, Concordia’s debt-to-equity ratio was 2.87. Higher debt might lead to volatile earnings because of increased interest expenses.

Conclusion: Is Concordia a Buy?

Whether Concordia is a buy depends on each individual investor’s appetite for risk. Concordia has an S&P credit rating of B, so the interest rate for its debt are higher than quality companies such as Apple, which has an S&P credit rating of AA+, and raised capital via a corporate bond in 2013 for an interest rate of 2.4%. For another comparison, Apple’s 30-year notes carry an interest rate of 4.65%.

That said, Concordia believes its cash flow generation is strong. In the next three years, it also expects to launch up to 60 new products, so it should continue its growth trajectory. However, the company will need to show the ability the pay interests and pay down its debt for the next two years for its share price to trend higher and sustain at higher prices.

The ideas of this article originated from my Seeking Alpha article here: What’s Most Worrisome About Concordia Healthcare Corp.

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Disclosure: At the time of writing, I own TSX:CXR.

Disclaimer: I am not a certified financial advisor. This article is for educational purposes, so consult a financial advisor and or tax professional if necessary before making any investment decisions.

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