Bill Ackman's bad week just keeps getting worse.
After watching one his top stocks, Valeant Pharmaceuticals International Inc., get mauled again, Ackman now confronts another indignity: news that the publicly traded security of his hedge fund, Pershing Square Holdings Ltd., might be headed for the junk-bond yard.
Only two days after Valeant handed Ackman a paper loss of about $764-million related to the common shares he owns, Standard & Poor's warned it might cut Pershing Square's credit rating to the cusp of junk-bond status.
The development is the latest in the months-long saga surrounding Valeant and Ackman, who's long been one of the drug company's biggest champions. Since August, when Valeant began the slide that has now erased almost 90 per cent of its market value, the fortunes of the company and the hedge fund manager have become increasingly intertwined.
On Thursday, as Valeant sank an additional 12 per cent, Ackman reiterated his support of the company – and said his investors are mostly standing by Pershing Square Capital Management. Ackman's fund is Valeant's third-biggest shareholder with a stake of about 9 per cent, including 6.3 per cent of the outstanding common shares.
Valeant is a problem, but one that he knows how to handle, Ackman told CNBC Thursday, adding that widespread redemptions from Pershing Square Capital weren't happening, and investors had pulled just 2 per cent of assets from the fund on Feb. 15, the latest opportunity they had to redeem. Their next chance to withdraw funds will come in mid May.
Still, S&P warned that it may cut its debt rating on the listed arm of Pershing Square, putting its BBB rating on the company on watch for a potential downgrade after the plunge in Valeant eroded its net asset value over the past five months, according to a statement from the ratings agency Thursday. Its current grade is two levels above speculative – or junk – a rating that would mean the company faces major ongoing uncertainties, or exposure to conditions that could make it less able to meet its financial commitments.
A spokesman for Pershing Square declined to comment on the potential downgrade.
After months of turmoil, Valeant's – and Ackman's – woes intensified on March 15, when the drugmaker cut its 2016 guidance and warned it may breach some of its debt agreements if it can't file its annual report on time. During a two-hour call with analysts, Chief Executive Officer Mike Pearson, not long returned from medical leave, was questioned about why he was the right man to lead the company.
As Pearson outlined his plans to "earn back the credibility" of Valeant, the company corrected a press release it had issued hours before, saying that one measure of earnings would actually be lower than it had stated.
Pershing Square Capital responded by telling investors it planned to take a much larger role at Valeant, acknowledging that investors have lost "total confidence in the company," contributing to the stock drop. An early sign of Pershing Square's increased involvement came last week, when Vice Chairman Steve Fraidin joined Valeant's board.
Despite the slide in the stock since Pearson returned to the helm of the drug maker just two weeks ago, Pershing Square Capital remains supportive of the Valeant CEO, according to a person familiar with the situation, who asked not to be identified discussing private information.
When Pershing Square posted its weekly performance through March 15, it wasn't pretty: net asset value per share fell to $15.42, compared with $20.96 at the end of 2015 – a 26.4 per cent drop. Pershing Square also said Wednesday it cut its stake in Mondelez International Inc. to 5.6 per cent, as the maker of Oreo cookies was performing better than other its investments. The block sale of 20 million shares was "for portfolio management purposes only," according to a statement.
Despite Ackman's conviction that he knows how to handle Valeant, investors continue to shun the company. Shares closed Thursday at their lowest price since January 2011.