Teva : Teva’s high-yield debut: an appealing proposal?

>Credit opinion: Negative // Market recommendation: Reduce - Teva is issuing $ 3.5bn of unsecured non-call life notes split across dollar and euro-denominated tranches and four, six, seven and ten-year maturities. The funds raised are mainly set to help repay all bank term loans totalling $ 3.7bn and thereby considerably reduce the amount of covenanted debt.Teva's fallen-angel debut comes almost two years after its last foray in bond markets. In July 2016, it raised $ 20bn in the context of the Actavis acquisition on highly favourable terms. Since then, the situation has dramatically changed with disruptions affecting the US generic market and generic competition on Copaxone resulting in three notch-downgrades to Ba2/BB/BB currently. While Fitch's outlook remains negative, it is now stable with Moody's and S&P, which should help secure a successful deal, on top of banks’ (possible) underwriting.The group seems willing to pay a significant premium to its current yield curve: the price talk stands at 6.00-6.25% and 7.00-7.25% for the dollar tranches and at 3.25-3.50% and 4.50-4.75% for the euro tranches, or a yield premium ranging between 50bps and 100bps on existing notes. Offsetting the high coupon, documentation will offer little protection to holders (in line with existing indentures).We initiate coverage with a Negative credit opinion and Reduce recommendation on all issues. The group is set to face a very difficult 2018 and numerous risks beyond 2018 (uncertainties about the ramp-up of new products, continuation of same adverse trends in US generics, impact from the restructuring plan) prevent us from venturing a more constructive view. Rating pressure could therefore reappear throughout 2018 and 2019 as results may deteriorate further than current expectations. We would also stay away from the proposed new notes despite their appealing pricing. Investors could in theory choose the new bonds over existing ones but yield convergence with the former bonds could be limited as the latter still benefit from better downside protection given their low cash price.Support factors - ? Industry-leading leadership in generics with a market share of 8% in volumes worldwide and 18% in the US. However, this is partly mitigated by the fragmentation of most markets addressed by Teva and the fierce competition given the commoditised nature of most products.? (Still) high cash generation thanks to solid EBITDA margins, generally static working capital and reasonable capex. Points to watch - ? The group is focused on the US (more than half of sales and about three-quarters of EBITDA). This market, traditionally very lucrative, is undergoing major disruptions, mainly in generics, which should continue to pressure Teva’s results.? The business model in generics appears highly aggressive with a focus on lucrative but volatile and risky first-to-file opportunities in the US.? The specialty portfolio, which could bring more stability, looks weakly positioned with, one the one hand, mature products facing generic risks and, on the other hand, a lack of convincing growth drivers in the pipeline. The upcoming decline in Copaxone sales will therefore not be offset by other products or new launches. ? Pressure on liquidity could reappear as we expect net leverage to peak at 6.2x in 2018, slightly above the covenant. The headroom on debt maturities in the coming three years is also not so strong.