Q1 2020 high yield bond and leveraged loan values in North America and Western and Southern Europe for the healthcare industry (covering pharmaceuticals, biotech and medical life sciences) were on par with numbers recorded in Q4 2019 at US$43.4 billion.
While numbers were relatively flat for the quarter, the industry was the third largest for US new money issuance in Q1 2020 and saw smaller falls in pricing than other sectors over the quarter in Europe.
These figures reflect challenges faced under COVID-19 lockdowns around the world. Lending activity slowed significantly across all sectors in March, so dips that month were not surprising. But notably, lending in the sector remained relatively steady through the turmoil. The volume of leveraged loans spiked from 11 in January to 23 in February before dropping to eight in March and then rising to 12 in April. High yield bonds followed a similar pattern, going from two in January to five in February, then to zero in March and three in April.
Healthcare and pharmaceutical companies have of course felt the economic impact of the virus. Capacity has been taken to extremes, which has increased costs and could see some providers pushed beyond their means.
Even though headline healthcare spending has increased through the course of the pandemic, some healthcare sub-sectors have seen earnings collapse, including dental groups and providers of elective procedures that had to halt operations during lockdown.
Lifelines tossed to the sector
While some have struggled through the crisis, a number of operators have benefited from relief financing supplied by governments.
The US government, for example, has supported healthcare providers that sustain losses attributed to treating COVID-19 with a US$150 billion allocation from the US$2 trillion Coronavirus Aid, Relief, and Economic Security (CARES) Act. The CARES Act saw US$30 billion automatically distributed to 500,000 healthcare providers in the first round of payments, although a number of recipients returned the funds to the government as their balance sheets were strong enough.
In Europe, a €37 billion (US$40 billion) Coronavirus Response Investment was implemented to support healthcare systems.
Capital markets have also been supportive. Loan markets have been shut across the board, but high yield bond markets have demonstrated a strong appetite for healthcare credits.
Recent financings make it clear that businesses in the sector still have a range of choices open to them. Stada, the German pharmaceuticals business backed by private equity firms Bain Capital and Cinven, priced €200 million (US$216.2 million) of new notes in May.
Another Cinven-backed healthcare group, Synlab, the medical diagnostics business and provider of COVID-19 testing, priced a novel bond-to-loan offering in May that will allow it to extend its debt maturity profile. Synlab priced €850 million (US$919.1 million) of senior secured notes, upsizing its offer from €400 million (US$432.5 million).
In the US, Tenet Healthcare has made use of all available financing options. The Dallas-based healthcare services business raised US$700 million of new bonds in April, took receipt of US$345 million in grants under the CARES Act and negotiated a US$400 million increase to its revolving credit facility to US$1.9 billion. More recently, the group announced a US$600 million private placement offer. These financings demonstrate lenders’ sustained interest in healthcare through the pandemic.
New sources of funding
In addition to tapping high yield bond markets generally, healthcare providers have also been first in line to benefit from the nascent but rapidly growing COVID-19 bond market, which has developed similarities to green and social bond markets.
The market for COVID-19 bonds, which emerged in the sustainable bond market in response to the spread of the virus, has grown to US$65 billion after starting in February when the Bank of China launched a COVID-19 impact alleviation social bond, according to Axa Investment Managers. At the current rate of issuance, Axa believes the market could be worth more than US$100 billion by the end of 2020.
Government and international agencies, including the World Bank’s International Bank for Reconstruction and European Investment Bank, were among the first issuers, but corporate players are entering the picture too. Pfizer raised a US$1.25 billion sustainability bond at the end of March. The bond has a ten-year tenure and will pay interest of 2.625%. Proceeds will be used to strengthen healthcare systems and broaden access to the group’s medicines and vaccines.
Work remains to define the qualifying standards for a COVID-19 bond, but this growing source of capital will provide an additional layer of support for healthcare operators through the pandemic.
Bumps in the road
Although financing is available, certain healthcare businesses may face some restructuring in the year ahead, especially in sub-sectors where operators were already under financial pressure before the crisis.
For example, many smaller pharmaceutical companies were already facing competition from low-cost generic medicine manufacturers while, in the US, out-of-network doctor groups, many backed by private equity, were readying for new legislation clamping down on surprise billing. Companies facing long-running legal challenges in controversial areas like opioid painkillers may also be pushed to the brink by COVID-19.
Other parts of the industry that shut down altogether will have to negotiate sharp drops in revenues and as a result some may struggle to survive in their current form. In the UK, a poll of the British Dental Association’s members revealed “70% of practices report that they can only maintain financial viability for a maximum of three months” following the government shutdown. Raising finance in the capital markets will be challenging for these credits.
A healthy outlook?
The healthcare market is broad and has been impacted in different ways. COVID-19 triggered a huge increase in healthcare spending, and demand for services has been near maximum. Numbers of elective procedures, which can be more profitable, dropped as hospitals battled the pandemic, but are likely to rebound as restrictions ease. Many healthcare providers may be able to turn to capital markets for financial backing against this backdrop, although some verticals will be affected more than others.
As the healthcare systems emerge from this crisis, the response to COVID-19 and the lessons learned will have wider implications for the provision and funding of healthcare.
Opportunities will emerge for lenders to fund new deals in areas like AI diagnostics and remote patient care. For now, though, the industry’s focus is on seeing off COVID-19 and generally coming through financially intact.
