(Bloomberg) -- A group of banks led by Barclays Plc has been stuck with $300 million of loans to Covis Pharmaceuticals Inc. that they can't readily sell, signaling that even in the relatively strong market for the debt, signs of cooling are emerging.
The loans are part of a $1.2 billion financing package tied to an acquisition that has been struggling for days because of investors' concerns about future profit at the company owned by private equity firm Apollo Global Management Inc. The group also includes HSBC Holdings Plc, Mizuho Financial Group Inc., Mitsubishi UFJ Financial Group Inc., BNP Paribas SA and Royal Bank of Canada, who are bookrunners on the sale.
Covis had already scrapped a planned U.S. dollar bond sale, and cut an offering of euro-denominated notes, amid weakness in bond and equity markets as money managers fret about Federal Reserve rate tightening.
Worries about central bank moves have helped support demand for floating-rate loans, one of the few markets that offers investors protection against rising interest rates. Investors have poured more money than ever into funds that buy leveraged loans, with three of the five biggest weekly inflows happening in 2022.
But loan prices have edged lower in the last few sessions, and Covis faces particular difficulty now. The drugmaker, bought by Apollo in 2020, gets more than 60% of its revenue from three products that each face headwinds, according to Moody's Investors Service. For one of the drugs, it's pressure from a generic competitor and for another, the potential to be removed from the market by regulators for being ineffective.
Representatives for Barclays and Apollo declined to comment. Spokespeople for HSBC, Mizuho, MUFG and BNP Paribas also declined to comment. RBC and Covis itself didn't immediately return requests for comment.
Portfolio Concerns
Moody's rates Covis B2, or five steps below investment grade. The debt will help finance Covis's purchase of products from AstraZeneca Plc, and will also refinance existing debt. Companies with those kind of ratings are still selling loans, but the bond grader said that after acquisitions and restructuring, it's hard to figure out what recurring costs are for the drugmaker or its likely future earnings. Investors told Bloomberg last week that concerns about the company's portfolio of products are a key factor in the tepid demand for its debt.
Banks stopped marketing a $300 million term loan that has second priority to get repaid if the company runs into trouble, known as a second lien. Instead it will stay on the lenders' balance sheets until they can offload it, the people said.
Covis's financing was previously planned to include $850 million total of junk bonds denominated in euros and dollars and a $350 million leveraged loan. The company then dropped the $475 million bond sale entirely and cut the euro bond to the equivalent of $350 million from $375 million.
At the same time, Covis increased the loan to $550 million and added a new $300 million second-lien loan, which is the portion that the banks are holding. Covis increased the yield on the euro portion of the bond to 8% from around 7%, according to one of the people.
While demand for floating-rate debt has been relatively strong in recent weeks as investors fret about Fed rate hikes, Barclays nevertheless had to boost the yield on Covis's first-lien loans to draw demand, cutting the issue price to 93 cents on the dollar. That's tied for the lowest level of the last 12 months for loans sold, with only two other deals having been discounted that much, according to data compiled by Bloomberg.
Even as the loan market has been relatively strong, the U.S. junk bond market lost 2.7% last month on a total return basis, its worst January ever. Ion Analytics, a financial information services firm, postponed a planned speculative-grade bond sale last week. U.S. high-yield bond funds have seen three straight weeks of investor withdrawals.
Orders for Covis's first-lien loan and bond offering are due this Friday.
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