Healthcare leveraged finance issuance climbs

Leveraged finance activity in the healthcare sector made strong gains through Q1 2021 as the pandemic response saw the industry attract steady investor inflows and M&A interest

With the pandemic still working its way through the world as vaccines are rolled out, the healthcare sector continues to see remarkable leveraged finance activity.

In North America, healthcare leveraged loan and high yield bond issuance (including biotech, medical and pharma sub-sectors) climbed 34% year-on-year from US$35.9 billion in Q1 2020 to US$48.1 billion in Q1 2021, making the first quarter of this year the busiest for healthcare issuance since Q2 2018.

In Western and Southern Europe, Q1 2021 leveraged loan and high yield bond issuance in healthcare came in at US$10.5 billion—a 30% year-on-year rise and the second largest quarter for healthcare financing since Debtwire Par started tracking this data in 2015.

Asia-Pacific (excl. Japan) (APAC) healthcare loan and high yield bond issuance was down year-on-year from US$3 billion in Q1 2020 to US$2.2 billion in Q1 2021 as the market paused for breath following a busy end to 2020, when healthcare loan and bond issuance came in at US$5.7 billion—the highest quarterly total for the sector in APAC on Debtwire Par record, going back to 2015.

The outlook for activity in APAC through the rest of 2021 is positive, with favorable government policies and private equity (PE) interest expected to spur loan and bond issuance, according to consulting firm Bain & Company.

Refinancing drives activity

As has been the case across the wider market, healthcare borrowers have taken advantage of low cost loan and bond markets to refinance and reprice debt at more attractive terms and extend debt maturities.

In the US, Q1 2021 refinancings, repricings and amendments in the healthcare space totaled US$38.3 billion, representing the bulk of overall healthcare issuance. For example, in Q1 2021, Owens & Minor, the Virginia-based healthcare logistics company, agreed a US$500 million senior unsecured high yield bond refinancing, maturing in 2029 and with a coupon of 4.5%, while EyeSouth Partners, the Atlanta-headquartered ophthalmologist group, negotiated a US$375 million term loan B refinancing package, also priced at 4.5%, with a 2028 maturity.

In Western and Southern Europe, refinancings also accounted for the majority of healthcare issuance, coming in at US$6.9 billion for Q1 2021. Notable European healthcare refinancings included Etypharm, the pharma group backed by PE firm PAI, which obtained a €555 million term loan B refinancing package priced at a margin of 3.5%.

In APAC, structured lending—bespoke financing packages for borrowers with complex, specific requirements—has been the top source of funding by healthcare issuers in Q1 2021, with US$1.37 billion of structured lending issuance representing over 60% of healthcare issuance in the region during that period.

Structured lending activity has been predominantly driven by APAC biotech and pharmaceutical companies that have required specific financing products to fund research and development. Refinancings, repricings and amendments issuance in the region’s healthcare sector, by comparison, totaled just US$620 million for Q1 2021.

Resilience and growth

The critical importance of well-funded healthcare infrastructure became increasingly clear throughout the pandemic and supported the rise in issuance among healthcare borrowers. Investors have also been drawn to healthcare assets as companies in the sector have generally delivered a combination of earnings resilience in volatile markets, and long-term growth upside.

The MSCI World Health Care stock market index, which tracks performance of healthcare companies across 23 markets, showed gains of 15.5% over the last 12 months. M&A activity in the healthcare sector has been equally robust, with companies and PE firms pursuing healthcare targets.

Pharma, medical and biotech M&A deal activity in North America more than trebled from US$16.1 billion in Q1 2020 to US$55.4 billion in Q1 2021. In Western Europe, over the same period, deal value across these healthcare sub-sectors more than doubled from US$11.2 billion in Q1 2020 to US$29.6 billion in Q1 2021. APAC’s healthcare sector also showed year-on-year gains in deal value, up from US$3.9 billion Q1 2020 to US$5.6 billion in Q1 2021.

Companies have been on the lookout for deals, especially in sub-sectors where COVID-19 stretched capacity and highlighted the importance of scale. According to a survey by Bain & Company, for example, half of US hospital administrators expect their organizations to make between one and two acquisitions by 2022.

PE firms, on the other hand, have been attracted to opportunities to back fast-growing health-tech businesses that are harnessing technology to streamline administration and develop new modes of service delivery. Buyout firms have also seen an upside in the healthcare logistics space, ranging from cold chain logistics to contract research organizations in the pharmaceuticals industry.

In Asia, meanwhile, PE interest in healthcare surged over the past year. Bain & Company research showed that in 2020 there were more PE healthcare deals in the APAC region than in either North America or Europe for the first time.

When PE healthcare deals have come to market seeking debt, leveraged finance markets have been open to funding large transactions on attractive terms. Following its US$2.3 billion acquisition by PE firm Blackstone, for example, the Japanese consumer health care division of pharmaceutical group Takeda had interest from five banks to finance the deal.

Of course, not all healthcare sub-sectors saw growth during the pandemic. Some, such as elective procedures and dentistry, were hit hard by lockdowns. Healthcare companies already faced with financial difficulties also struggled. Medical Depot, the US medical distribution and supply group, for example, defaulted in April 2021 after entering into debt restructuring talks back in September 2019.

For most healthcare businesses, however, debt markets remain open for business with lenders eager to gain exposure to the sector’s favorable underlying dynamics and refinance or fund buyouts of resilient healthcare companies.

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