S&P puts Ackman's Pershing Square on downgrade watch
Billionaire activist investor Bill Ackman's Pershing Square Holdings has suffered a new setback linked to the plunge of its Valeant Pharmaceuticals International (VRX) investment: a Standard & Poor's warning of a potential rating downgrade.
Pershing Square's net asset value has dropped substantially, "largely because of a precipitous decline in the market value of Valeant," S&P said Thursday, referring to the nearly 89% nosedive in the embattled drugmaker's value since early August.
"We placed the ratings on CreditWatch negative to reflect the substantial drop in PSH's net asset value over the past five months as a result of very weak investment performance," wrote S&P credit analyst Trevor Martin.
The net asset value of the fund, rated BBB by S&P, sank to $3.8 billion on March 15, down from $5.3 billion at the end of October, as debt to total assets increased from approximately 15% to more than 20%, the rating agency said.
Although the ratio increased beyond the rating agency's expectations, S&P said Pershing Square management had "taken proactive steps to respond to the turmoil" by announcing this week that the fund had sold 20 million shares of what initially was a $5.5 billion ownership stake in snack food giant Mondelez International (MDLZ).
After the sale, the level of cash held by the fund exceeded total debt, S&P said.
However, the rating agency also warned that Pershing Square has lost money on 11 of 12 investment positions since Oct. 27, when S&P revised its outlook on the company to negative. In particular, shares of Nomad Foods (NOMD) and Howard Hughes (HHC) lost 45% and 20% of their respective values, S&P said.
Ackman's Pershing Square unit is down 26% so far this year, after posting a 20% loss for 2015. Pershing Square's financial performance has been "weaker than its peers" since S&P started rating the fund in May 2015, "in contrast to its stellar track record in previous years," the rating agency said.
S&P said it could downgrade its Pershing Square rating if Valeant filed for bankruptcy court protection or if Pershing Square lowered its free cash level "before Valeant's stock price has substantially recovered."
The drugmaker has delayed filing its annual report amid an internal investigation of its since-cancelled business relationship with a specialty pharmacy firm that distributed Valeant medications. Short seller Andrew Left's Citron Research in October accused Valeant of creating an apparent "network of phantom captive pharmacies" to steer pharmacy benefit managers to the drugmakers more expensive drugs, instead of less-costly alternatives.
Valeant denied the allegations. However, the company has confirmed it is under investigation by federal prosecutors in Massachusetts and New York, the Securities and Exchange Commission and two congressional committees.
Follow Paste BN reporter Kevin McCoy on Twitter: @kmccoynyc