By Jonathan Schwarzberg
NEW YORK, Oct 21 (Reuters) - Banks arranging a
US$1.865bn-equivalent of leveraged acquisition loans for US
pharmaceutical company Concordia Healthcare had to offer heavy
discounts and other concessions to attract investors as this
part of the US healthcare sector continues to be pummelled.
Pharmaceutical companies debt and equity prices have been
under pressure since presidential candidate Hillary Clinton
announced plans to lower drug costs. The term loans of Concordia
moved lower during the Wednesday session as a short-seller's
fraud accusation against Valeant Pharmaceuticals (N:VRX) spooked loan
investors after initially trading higher post-break.
The deal, which finances Concordia's US$3.5bn acquisition of
Amdipharm Mercury, includes a US$1.1 billion term loan and a
£500m term loan.
The US$1.1bn loan priced at 425 basis points (bp) over Libor
with a discount of 94.5% of face value on Wednesday and the
£500m loan priced at 500bp over Libor with a discount of 93.5.
Both tranches had a 1% Libor floor.
The concessions, which can reduce or eliminate arranging
banks' profits in extreme cases, were offered to encourage
investors to join the deal. Both tranches were originally
offered with discounts of 99 of face value.
Goldman Sachs (N:GS), Credit Suisse (VX:CSGN), Royal Bank of Canada and
Jefferies underwrote the financing package backing the deal.
In addition to offering a discount on the term loans,
Concordia had to add a US$180m equity bridge loan and extend the
maturity of US$135m of that bridge from two to seven years,
after selling only US$520m of stock to back the deal. The
company also issued US$790m of notes.
Soft call protection was also extended to one year from six
months and amortizing repayments were added to the dollar and
sterling term loans.
Hillary Clinton's proposal to rein in high drug prices has
hit pharmaceutical valuations and was cited as a contributing
factor for the difficulty in getting financing for Concordia.
Republican presidential candidate Marco Rubio also spoke out
against high drug prices on Monday.
Concordia held an investor call last Tuesday during which it
told investors that its growth was based on volume increases
rather than price increases, which helped to allay some
investors' concerns, one banker said.
After the discounts widened to 93.5-94.5 the book saw a
flood of interest and was oversubscribed by two times, investors
said.
Concordia's secondary loans rose above their discounted
levels in secondary trading in New York and London after
breaking on Wednesday. The US$1.1bn term loan rose to
95.75-96.75 and the £500m loan was bid at 95-95.5. The term loan
fell to 94.25-95.25 on Wednesday afternoon on the Valeant news.
"The strength of Concordia on the break this morning will
give the market confidence," a London-based loan trader said
before the Valeant story shook the sector.
US pharmaceutical company Sucampo also finalized a US$250m
term loan backing its acquisition of fellow rival pharmaceutical
company R-Tech Ueno Ltd with a discount of 97 this week.
The spread on the loan was also increased to 725bp over
Libor from 700bp over Libor.
Concordia's hard sell coupled with the low average secondary
prices of pharmaceutical companies such as Valeant that continue
to fall, is making it difficult to underwrite and syndicate new
loans for pharmaceutical companies as pricing corrects.
EUROPEAN EFFECT
Pricing and discounts were also widened on a 505m loan
backing the merger of German rehabilitation clinics Median
Kliniken and RHM on Wednesday after pushback from investors,
banking sources said.
Arranging banks Deutsche Bank (DE:DBKGn), IKB, SEB and NIBC are leading
the deal which also dropped a term loan B2 that was intended to
finance dividend payments to owner private equity firm
Waterland.
Investors were worried about leverage on the loan, but
general concern about the healthcare sector was also cited as a
reason for investor pushback.
The covenant package has also been tightened to keep
leverage at 4.75 times from up to 5.75 times previously. Books
on the deal are due to close on Wednesday.