![]() Amateur and professional investors alike can get creamed by companies with litigation risk. Litigation is nearly impossible to quantify and is frequently digital in nature. Stick with companies with a DEBT/EBITDA ratio of less than 4x. Debt/EBITDA is not a perfect measure of leverage, but it will suffice for most amateurs. If that's you, I advise you to at least avoid companies with a lot of leverage. Many investors only look at earnings and have no experience analyzing balance sheets, statements of cash flows or following the debt markets. Highly leveraged companies are risky, full stop. That includes assuming management is not telling you the entire truth or is at least trying to paint all news in the best light. If an opposing view comes along, don't treat it like someone kicking your dog. Keep an open mind and skeptical eye about all investments.Regardless of the losses, in the postmortem, there are a few lessons to glean from Endo. I sincerely hope my articles tempered investors' enthusiasm, at least enough to either not own so much of this disaster or to sell when they still had some value. As it turned out, Endo's core business wasn't even particularly stable, despite many people's high hopes for the company's drugs such as Xiaflex and Qwo. Regardless of a company's stability, 5x net leverage is high. ![]() Even in the rosiest scenarios, Endo was running with over 5x net leverage, the majority of it first lien. I get that we went through a period where companies could run with excessive leverage and refinance any maturing debt without much difficulty. What struck me most about the pushback, however, was how little people paid to the balance sheet. Investors generally only want to hear good news about their investments and take any critiques as personal attacks. I took considerable flack for my bearish call on this company. What Investors Can Learn from This Bankruptcy However, even I, as bearish as I was on the company, did not expect Vasostrict profits to vaporize so quickly and for the company's operations to deteriorate at such velocity. Last summer, I originally believed that bankruptcy protection would be the company's way of settling its opioid claims, with the potential loss of the Vasostrict patent trial as an added operational risk. Perhaps there are day trades to be had there, but ultimately I expect zero value unless the company's performance recovers amazingly during the year, which I consider unlikely This case will now come down to valuation and a judge will have to confirm that valuation and all settlements. The details are a bit scant, but judging by first lien debt in the high 80s to low 90s, second lien in mid-20s and unsecured in mid-single digits, I expect the first liens to get some sort of small reinstatement of debt and most of the equity here while the second liens and unsecureds get some small amount of equity. The secured holder offer is what is known as a stalking horse bid. 35 state AGs have agreed to settle with the company. The first lien debt holders are essentially offering to buy the company for $6 billion and offering a $550 million settlement for opioid litigants. As per usual in bankruptcy cases, the various advisors and lawyers will feast on the carcass and will be paid first. The company hired Skadden, Arps, PJT Partners and Alvarez & Marsal as bankruptcy advisors. Endo International ( ENDP) filed a petition for bankruptcy on August 16th after reaching an RSA (restructuring support agreement) with a majority of its first lien debt holders.
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