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 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, Credit Suisse, 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.
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, 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.
Additional reporting by Lisa Lee. Editing By Tessa Walsh and Jon Methven