In total, eight issuers were drawn in by attractive pricing to refinance and reprice, making up a good chunk of deal flow. Atnahs for example, shaved off 100 bps in the repricing of its €614m term loan B. Pricing was revised to E+400-425 bps from 425-450 bps at launch during the syndication process, following strong market demand, according to LPC.

Buyouts have also driven new loan issuance in the sector. Companies issuing debt to fund an LBO in 2021 include Nordic Capital’s $846m take-private of drugmaker Advanz Pharma and EQT’s $2.1bn take-private of Recipharm, the Swedish contract pharma business. Advent International decided on a fund-to-fund transfer for portfolio company Mediq, following an incomplete sale process of the Dutch medical supplier touted to value the company at €1bn, according to Reuters. CVC and Charterhouse’s purchase of French drugmaker Cooper values the business at €2.2bn, according to Bloomberg.

The flight to quality, which characterised investment appetite for sponsors and lenders alike since the outbreak of Covid-19, is reflected here. Positive market dynamics that have always attracted investors to the sector still apply. Buysiders see an opportunity to access companies with, in many cases, strong geographic and product diversification, and performance relatively resilient to the economic cycle. Many healthcare companies also stand to benefit from demographic trends such as an aging population and a growing focus on wellness.

But in addition, the Covid-19 pandemic has lifted the profile of the healthcare sector. Governments and the general public have renewed concern for their healthcare systems, from diagnostics to pharmaceuticals and all the medical technology companies and healthcare providers in between. This sea change is unlikely to ebb as potential virus variants loom, and healthcare officials warn against the next major pandemic that may strike.

The pandemic has also benefited some issuers more directly through Covid-19-related bumps to EBITDA and revenue. Mediq, which closed a €500m TLB in February after tightening pricing from E+375-400 bps to close at E+350 bps, witnessed revenue growth of 16% to €1.97bn in its 2020 financial year, attributed mainly to the increased need for PPE.

This did not stop the company from substantially adjusting EBITDA, a trend that is now common among LevFin borrowers. Two sources told 9fin they didn’t believe the €100m figure Mediq was marketing for its EBITDA, calculating €80.5m of pro-forma EBITDA instead.

Although substantial EBITDA adjustments can be indicative of the assumptions management can make, these adjustments are unlikely to materially affect buyer appetite for a loan. Buysiders will often underwrite to their own EBITDA estimates and leverage metrics and get comfortable with credits on that basis.

Perhaps a larger concern is transaction multiples in the current market. Sources disagree on whether high transaction multiples are a facet of the ECB effectively pumping money into the market and should not be a worrying feature, as one source says: “A key concern would be increasing asset prices and/or multiples as we have seen in other industries.”

Aggressive acquisition action

New loans will, in many cases, back acquisition strategies for 2021 and beyond. Indeed, French private hospital providers appear to be engaged in an acquisition and consolidation race with one another, with the primary loan market the main beneficiary.

Elsan brought a €350m add-on to finance a recent acquisition of French medical clinic operator C2S. The acquisition was expected to push Elsan to the position of largest private healthcare provider in France. Almaviva Santé, the smallest of France’s four largest providers, then followed suit, launching a €290m 2028 TLB to refinance existing loans and push out maturities to 2028. Ramsay Sante then launched its refinancing in March, which will also include a new €100m guaranteed senior secured capex/acquisition facility due 2026.

Lenders have appreciated the strong brand name recognition of these providers, as well as the support that they are likely to receive from the French government in the coming years, especially due to the pandemic; however, because of a lack of geographic diversification amongst the different companies, avoiding concentration of portfolios is a consideration.

Aggressive acquisition strategies are not limited to private hospitals or care providers.

Pharmaceuticals companies gearing up for acquisitions this year include Centrient Pharmaceuticals, which attached a €180m add-on loan to a repricing of its existing loans to acquire Astral SteriTech. Since the closing of its TLB, Mediq acquired Medirum, a provider of medical technology products for hospitals and healthcare facilities in Sweden. NextPharma has launched a €290m TLB to acquire two sites from Lonza, a Switzerland-based chemicals and biotechnology company.

But not all buy-and-build strategies are created equal.

One concern for buysiders includes pharmaceutical businesses that must acquire companies for their patents every few years. However, one source said of the industry: “In general, lenders understand that the contract development and manufacturing organisation industry is very fragmented with a strong rationale for further consolidation driven by both PharmaCo's wanting to consolidate their complex supply chains post-COVID as well as significant scale benefits across a diversified platform.”

The Wild WES(G)t

ESG ratchets have become a common feature among loan issuance since 2021. Elsan’s 15 bps ratchet, doubled from 7.5 bps towards closing upon strong demand, will move depending on three ESG-related metrics, such as the reduction of medical waste. Ramsay Sante’s margin on its €1.35bn term loan will be linked to ESG targets, both rising and falling.

Richard Lloyd, a partner in the debt finance group at White & Case, says: “The leveraged loan market has not yet formed a final consensus as to what these provisions should look like. The approach is definitely still evolving and new terms are emerging, often to refine the provisions to make them more acceptable to investors – such as the requirement to donate margin savings to charity or to invest them in ESG projects."

The raft of ESG ratchets have largely been seen amongst the healthcare providers rather than pharmaceutical companies that have come to market of late, with one notable exception in Recipharm. The company plans to reduce the environmental impact of production to a minimum, including reducing GHG emissions, according to a source.

ESG ratchets in healthcare loans

Lloyd says: “It’s still quite ad-hoc as to whether ESG provisions are included in leveraged loans and so it is dealt with on a deal-by-deal basis. Some sponsors now include ESG margin ratchets in their initial grids as a matter of course and certain banks, often those with specialist ESG desks, are more comfortable promoting or negotiating these terms, but there is no clear trend as to who is driving the market.”

The recent trend in ESG ratchets amongst private hospital chains may be driven more by the fact that they are based in France and have French advisers, rather than the fact that they are healthcare providers. Indeed, market participants see no reason why pharmaceuticals companies will not join the ESG fray.

Diversity of the governance of boards, could be a basis for an ESG ratchet, or if a company has exposure to the Opioid epidemic, though this is unlikely to be too relevant in Europe.

Additionally, like in the case of Recipharm, pharmaceuticals could attach ratchets to the reduction of their production waste. Lloyd says: “There is no obvious reason why the healthcare and pharmaceuticals sector has not yet widely adopted ESG margin ratchets in its leveraged loans, although there are recent examples. The early adoption of ESG provisions has been very sector specific, particularly focused on telecoms, industrials or retailers with a large real estate footprint and specifically credits who want to improve their ESG reputation. Healthcare and pharma seem a perfect fit for these provisions.”

Time to hit the brakes?

Many major buysiders are actively investing in the healthcare sector. PGIM currently favours the BB-rated segments of the market in defensive sectors including healthcare, according to its October 2020 quarterly report, while Blackstone Corporate Funding’s largest industry allocation is in healthcare and pharmaceuticals, with 15.2%. Thus it is difficult to imagine the healthcare train hitting the buffers soon.

However, all good things must come to an end, and lenders are showing some signs of fatigue over the aggressive terms and pricing currently being seen in the market.

For example, guidance on LGC’s recently finalised dividend recapitalisation flexed wider after launch. The UK-based life sciences firm's euro-denominated TLB priced at E+375 bps from revised guidance of 375-400 bps, up from 325-350 bps at launch. The tranche has a 0% floor and a 99.75 OID, tightened from 99.5 at launch, while the dollar denominated tranche priced at L+375 bps from revised guidance of L+375-400 bps and up from L+350 bps at launch.

Lloyd says there may be another dynamic at play: "Some funds are overweight in healthcare and are looking elsewhere in order to diversify. It’s a defensive sector and Covid has amplified the interest, so it has been very popular, but you might not see as much competition for these assets going forward."

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