It's No longer A Prediction----The Crash Of Valeant Means The High Yield Collapse Is Here

By Justin Brill at The Growth Stock Wire

Today, we begin with a warning...
Please read carefully. Something critical happened this week.
Never have so many of the smartest people on Wall Street been so wrong. And what happens next could send ripples throughout the entire market.
But first, a little background...
Until last year, most folks had never heard of Valeant Pharmaceuticals (VRX).
That all changed when a Wall Street Journal report made the company a "poster child" for an outrageous new trend: companies buying the rights to existing drugs and treatments, then immediately jacking up their prices.
The report earned the company widespread criticism and even congressional inquiries, but it didn't stop the stock from hitting an all-time high of $264 per share last August.
Unfortunately, Valeant's problems were just starting...
Last fall, questions began to surface about the company's accounting and business practices.
In simple terms, it appears the company may have tried to hide its relationship with a smaller, specialty pharmaceutical company in order to increase insurance company reimbursements.
All you really need to know is that these were serious allegations.
Several short-sellers published reports alleging outright fraud. One in particular went so far as to call the company a "pharmaceutical Enron."
The news got even worse last month...
On February 23, Valeant finally admitted it might have to restate prior-year earnings after an internal review "raised questions about its accounting practices."
The following week, the company officially announced it was under investigation by the Securities and Exchange Commission ("SEC"). But that wasn't even the worst news of the day. From a February 29 article in the Wall Street Journal...
News of the SEC probe capped a dizzying 24 hours in which Valeant scrapped its previous financial guidance without explanation; abruptly canceled a call set for Monday to discuss its fourth-quarter earnings; and first scheduled, and then canceled, a separate, private call with analysts.
It also disclosed that Chief Executive [J.] Michael Pearson would resume his post after a two-month medical leave; said it would take the chairman's role away from Mr. Pearson; and indicated one of its key drugs was under assault from a competitor.
The company also said it would be unable to file its 2015 "Form 10-K" – an annual, audited report of financial performance required by the SEC – by that week's deadline, and that it didn't expect to be in a position to file it within the SEC's 15-day extension period.
That brings us to this week... Shares of Valeant suffered an incredible crash, dropping about 60%.
You see, Tuesday – March 15 – marked the end of that extension period. And as predicted, Valeant has now officially missed the deadline to file its 10-K.
There is now a very real chance that Valeant could default on its $30 billion in debt... and set off the next phase of the global credit crisis Porter has been warning about for months.
Failure to meet this extension means Valeant is now in breach of its bond agreements, or "covenants." Bondholders can now legally deliver a notice of default. According to the Wall Street Journal, the company now has until April 29 to file the report or it will officially default.
What would a default mean?
Frankly, we have no way to know for sure.
But this is exactly why you should take some simple precautions to protect your portfolio... and why you should avoid overpriced stocks and most bonds at all costs.
While we can't know exactly what will happen if Valeant defaults on its $30 billion in debt, plenty of signs warn the "contagion" could be massive.
Let's start with Valeant shares...
As we mentioned, the stock plunged about 60% this week. It has now fallen nearly 90% from its all-time high last August.
But you may be surprised to learn that despite clear warning signs for weeks that the company would likely miss this week's deadline... Valeant was still one of the most widely held stocks on Wall Street.
Believe it or not, an incredible 88% of Valeant shares were held by hedge funds, mutual funds, and other institutional investors. There's simply no telling what kind of ripple effects could be created if these holders are forced to raise cash and sell other positions to meet margin calls or investor redemptions.
For example, billionaire investor Bill Ackman is the largest hedge-fund shareholder of Valeant. His Pershing Square Holdings owns more than 21.5 million shares of the company, according to the latest data available.
Pershing Square's portfolio was already down nearly 20% year-to-date, after losing more than 20% last year – its worst year in history.
Estimates suggest Ackman lost nearly $1 billion more during Valeant's plunge... bringing his yearly loss to more than 25%.
Hedge funds rarely recover from these kinds of losses... Don't be surprised if you hear Pershing Square is closing its doors. If so, this means the fund's other holdings could be sold, too... causing the selling to spread.
If Valeant does default – particularly if the SEC finds wrongdoing – it could easily spiral into bankruptcy... meaning shares would be worth nothing.
But it's not just Valeant shares that are concerning...
Valeant's debt is also a major holding in some of the world's most popular bond and leveraged-loan funds and indexes, like the iShares iBoxx High-Yield Corporate Bond Fund (HYG), the SPDR Barclays High-Yield Bond Fund (JNK), the PowerShares Senior Loan Fund (BKLN), and the S&P/LSTA U.S. Leveraged Loan 100 Index.
This debt is not yet trading at "distressed" levels. But if these problems continue, it's only a matter of time before it is. And this could be a much, much bigger problem for the markets.
We know that saying Valeant could default on $30 billion of high-yield debt may not mean much to you. But it's important to understand just how serious this could be.
Valeant's debt makes up more than 1% of the most widely owned high-yield bond funds and exchange-traded funds ("ETFs"). A default will cause investors to pull out their money... which will cause the funds to sell other bonds to meet those redemptions... which will then cause yields to rise across the high-yield market.
This is the risk of contagion we've been warning about for months. It's what Porter has devoted so much of his time trying to explain. But Valeant isn't the only concern... It's just one of countless "dominoes" that are ready to fall.
Another $13 billion in energy debt has already defaulted this year... not including Peabody Energy (BTU), which warned of bankruptcy this week. Ratings agency Fitch says it expects at least another $63 billion in defaults this year.
The bottom line is clear: What Porter has said about a high-yield collapse is no longer a prediction... It's already here.
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Source: It's No Longer a Prediction... the High-Yield Collapse is Here - The Growth Stock Wire

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