January 11, 2019 / 2:55 PM / 4 months ago

Healthcare deals raise pulse of US lending in 2019

NEW YORK, Jan 11 (LPC) - Bankers are diagnosing another robust year for US healthcare lending. The first two big loans of 2019 are financing the acquisitions of pharmaceutical companies, including the largest ever tie-up in the sector, and more are expected.

In just under two weeks, Bristol-Myers Squibb Co announced it was buying Celgene Corp for US$74bn, supported by a US$33.5bn bridge loan that is the sixth-biggest bridge loan on record, and drugmaker Eli Lilly and Co said it will purchase Loxo Oncology for US$8bn in a deal backed by cash and debt.

“There were expectations for a muted M&A pace after a record year last year, with trade talks and concerns about the economy, but that seems not to be the case for healthcare,” a senior banker said.

Healthcare companies are under ongoing pressure to slash soaring medical costs, and ramp up treatment options, driving the push to consolidate as pressure mounts to provide affordable care.

Transformational change in the industry has already been producing mega-mergers for more than a year and should continue to foster new corporate combinations, bankers and lawyers said.

While the year has just begun, and bankers said it is too soon to extrapolate full-year loan volume, bank appetite to lend is plentiful.

The two big healthcare deals jump-starting the 2019 M&A market could “give other companies a reason to expand their businesses and banks the opportunity to fill the jelly bean jar” with income from arranging new loans, another senior banker said.

Loans to back mergers and acquisitions of US high-grade companies overall last year hit a record US$235bn, topping the previous high set in 2017 by 16%, according to LPC.

Of that new peak, US$32.2bn was for healthcare M&A deals, which already looks likely to be surpassed this year.

“The tectonic plates underneath the healthcare business in the United States and globally are moving,” said Enrico Granata, a partner at King & Spalding who specializes in mergers and acquisitions.

Investment grade US healthcare M&A lending last year trailed only technology (US$45.3bn), beverage/food (US$42bn) and media (US$40.3bn).

SEISMIC SHIFT

The Affordable Care Act, the federal medical insurance marketplace, known as Obamacare, remains in place despite Trump administration efforts to have it overturned, adding pressure for the sector to streamline and gain efficiencies.

“The government is invested in healthcare, and the incentives for both government and industry are very strong to have these bigger platforms to control and mine data, for more insight and economies of scale,” said Granata.

To cut upfront costs, larger companies are also looking to buy smaller firms with specialties including oncology, immunology and cardiovascular health, as a way of outsourcing research and development, analysts and lawyers said.

“For the bigger corporate mergers, there is a huge appetite for banks to lend – the capital structure of the industry is not overleveraged,” said Granata. “These are cash-rich businesses and there is a lot of leverage capacity in the space, meaning companies have the ability to take on more debt and then pay it down with strong cash flow.”

Moody’s Investors Service, S&P and Fitch Ratings put Bristol-Myers on notice that they could lower the company’s credit ratings of A2/A+/A-, respectively, citing factors including the added acquisition debt and product pipeline risk. Free cash flow, however, could help hasten the company’s deleveraging efforts.

Lending for large transformative M&A deals is also lucrative for banks.

The Bristol-Myers bridge loan, for example, which is evenly split between Morgan Stanley and MUFG, will earn the arranging banks an estimated total US$110.3m in fees for underwriting the financing, according to Refinitiv’s Deals Intelligence.

Among the sizable US loan financings for high-grade healthcare mergers in this transformative deal wave were US$49bn of loans announced in December 2017 supporting drugstore operator CVS Health Corp’s US$69bn purchase of health insurer Aetna Inc, and a US$26.7bn bridge loan announced in March 2018 backing health insurer Cigna Corp’s US$52bn acquisition of pharmacy benefits manager Express Scripts Holding Co.

The CVS loan remains the second biggest US bridge loan on record, trailing only the US$61bn loan in 2013 which backed Verizon Communications Inc’s purchase of a stake in Verizon Wireless that it did not it already own. (Reporting by Lynn Adler Editing by Tessa Walsh and Jon Methven)

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