Herbalife Ratings and Estimates Put Under Review by BAML

Herbalife Ratings and Estimates Put Under Review by BAML

Herbalife Ltd. (NYSE:HLF) was notified today by KPMG that it was resigning as the company’s independent accountant as the partner in charge of KPMG’s audit practice in Los Angeles has allegedly participated in insider trading, passing information to others who then traded in the shares.

Until last week, the partner in question had been the engagement partner on Herbalife’s audit. KPMG resigned from two clients today since the firm no longer considers itself independent (the other client is the California-based footwear brand Skechers USA Inc NYSE:SKX)) and withdrew their auditor reports, impacting Herbalife Ltd. (NYSE:HLF)’s financial statements from 2010-2012.

BAML withdraws ratings

KPMG said in their press release that it has “no reason to believe that the financial statements of these companies have been materially misstated”. However, while clearly not the fault of Herbalife Ltd. (NYSE:HLF) according to Bank of America Merrill Lynch (BAML) Analysts state that they are required to base their views on audited financial statements and, as a result, BAML ‘must place our rating and estimates under review until a new audit opinion is obtained’.

KPMG issue, but unfortunate circumstance for Herbalife Ltd. (NYSE:HLF)

While on the surface this looks like it’s solely a KPMG issue, it is an unfortunate circumstance for Herbalife despite what looks to be no misconduct on its part. With the withdrawal of its audit reports, the company’s 2010-2012 financials are now considered unaudited and HLF needs to find a new auditor during a period of elevated headline risk. Herbalife has started the search process.

In addition, since HLF’s credit facility includes a customary covenant requiring audited financials, it is in discussion with its debt holders to obtain a waiver on this requirement. Herbalife likely would not have needed to draw on this facility in the interim as the company is in its customary quarter-end blackout period (typically 10 days before quarter-end until it reports earnings) and thus currently restricted from active share buyback.