The downgrading of Wockhardt’s debt by two major rating agencies highlights the overstretched position and future troubles for the drug maker in tiding over its financial crisis.
Rating and advisory firm Crisil downgraded its rating on Wockhardt, which is reportedly attempting to sell off some of its assets to clear its imminent payments, citing its debt has become 3.75 times of its equity. Crisil said as on December 31, 2008, Wockhardt’s debt has risen to Rs 3,777 crore, whereas the same was Rs 2,910 crore a year go, resulting in a high gearing.
The ratings on the pass through certificates (PTCs) backed by loan receivables from Wockhardt under the securitisation transaction of Barclays Bank has been downgraded due to higher-than-expected increase in the company’s debt, continued high gearing, and significant refinancing risk arising from large debt dues in the next two years, said Crisil.
Fitch Ratings, another global credit rating agency, had downgraded its rating for Wockhardt last month, citing its debt increased by around Rs 900 crore due to higher short-term loans and foreign currency fluctuations. Its downgrade also factored in the liquidity pressures being faced by the company due to increased working capital requirements at the US operations and uncertainty over the repayment of its $140 million FCCB (Foreign Currency Convertible Bonds) obligations falling due in September 2009.
The Rs 2,653 crore drug major earned 64 per cent of its revenues from Europe and the US in 2007.
The Khorakiwala family, the promoters of Wockhardt, had to pledge about 40 per cent of its stake with financial institutions to raise about Rs 350 crore, mainly for the expansion of its hospital chain, said sources.
Wockhardt’s promoters had to call off a planned initial public offer of the hospital chain, following the stock market crash during the last year.
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Reportedly, the company has put on block some of its assets in the US and Europe, land in Aurangabad and a few large brands in consumer health care segment. Further, the posh corporate office at Bandra Kurla Complex has also been pledged to raise funds. Recently Wockhardt got shareholders approval to raise another Rs 500 crore through the issue of redeemable preference shares for the redemption of FCCBs and for general corporate purpose.
Investment bankers and analysts opine that even if Wockhardt is ready to sell off its assets abroad, there are no takers at an attractive valuation due to financial turmoil in the West.
According to industry observers, costly acquisitions and aggressive expansion in the past are putting pressure on the company, at a time when the financial markets are globally down. In the past two years, it had acquire Ireland based Pinewood Laboratories for $150 million, Negma Laboratories of France for $265 million and Morton Grove Pharmaceuticals in the US for another $38 million. The company also spent heavily on product registrations globally for its biotech products and for licensing of over a dozen for the domestic market.
Over the next two years, Wockhardt faces a challenge of meeting significant debt repayments of Rs 2,372 crore - Rs1,324 crore in 2009 and Rs 1,048 crore in 2010. Although some comfort is derived from the cash and cash equivalents of Rs 300 crore available as on December 31, 2008, the company may need to raise additional cash through sale of some of its profitable brands or businesses in order to meet these obligations, assessed Crisil.
The rating agency felt Wockhardt’s credit risk profile continues to derive strength from the company’s strong business profile, as visible in its growing international and domestic presence, and focus on research and development. In the first nine months of 2008, the company derived 74.5 per cent of its total revenues of Rs2644 crore from exports, mainly to the regulated US and European markets.