LPC: US healthcare lending rouses from policy-induced sedation


Reuters

By Lynn AdlerNEW YORK, April 20 (Reuters) - US drug distributor Cardinal
Health Inc's deal to buy Medtronic Plc's medical supplies units
days after Abbott Laboratories agreed to a long-awaited purchase
of diagnostic testing company Alere Inc has raised the pulse of
a sector suppressed by potential healthcare policy upheaval.
    Healthcare deal-making among high-quality companies has
stalled, with President Trump and the Republican Congress
tackling and then unable late last quarter to repeal and replace
the Affordable Care Act, known as Obamacare. Highly anticipated
tax reforms are being delayed by the ongoing healthcare policy
debate.
    President Trump has vowed to cut corporate taxes, as well as
allow companies to bring cash stockpiles held overseas back to
the US at sharply reduced tax rates, which could also stoke
merger and acquisition activity.
    Investment grade healthcare companies borrowed just US$10bn
in the loan market in the first quarter, 57% less than a year
earlier, according to Thomson Reuters LPC. Loans to high-quality
companies accounted for 60% of the US$178bn in healthcare
lending last year. But in the first quarter, the share sank to
just 28% of the US$35.5bn volume.
    "For healthcare M&A, transformative deals may be more
limited in 2017 due to uncertainty related to Obamacare ‘Repeal
and Replace' as well as pending tax reform," said Allen Fisher,
a managing director and global head of healthcare banking at
MUFG. "Comprehensive tax reform seems almost as unlikely as
healthcare reform."
    The deal logjam budged on Tuesday when Cardinal said it
would buy Medtronic for US$6.1bn and agreed to a US$4.5bn bridge
loan before locking in longer-term debt.
    Earlier in April, diversified healthcare company Abbott said
it would buy Alere at a lower price than initially offered in
February 2016, with both companies agreeing to drop lawsuits
that prolonged the transaction. Last year, Abbot raised a US$9bn
bridge for the Alere deal, and has yet to detail further
financing needs.
    These tie-ups come on the heels of several high-profile
health insurer mergers - Aetna with Humana and Cigna with Anthem
- scrapped by separate anti-trust rulings earlier this year.

    BEST PRESCRIPTION?
    While healthcare mashups are being subdued, domestic M&A
broadly is being curbed by the considerable uncertainty
surrounding tax and trade policy. Some mergers will push
forward, based on an urgency for a takeover target, bankers
said.
    "On the one hand you have PPG trying to go hostile into the
Netherlands - which under the best of circumstances is difficult
- as an example of an issuer willing to power through for an
asset it wants to buy," said a senior banker who expects ongoing
strategic consolidation.
    On Wednesday, Pennsylvania-based PPG Industries dismissed
efforts by Dutch paintmaker Akzo Nobel to fend off its takeover
bid and won support from an activist hedge fund investor,
Reuters reported.
    "On the other hand, there may be other Fortune 500 companies
that are very much prepared to wait it out and see what the
exchange rate environment, regulatory environment and general
financing environment are before deciding if it's still
worthwhile," said the banker.

    DIAGNOSING VALUE
    Amid the unknowns, investors in the healthcare arena are
scrutinizing their picks sector by sector.
    "We're trying to assess company performance to see whether
there are going to be any liquidity issues, any collection
issues, bad debt issues, things that would be indicative of the
way payments and coverage may be affected," said Farboud
Tavangar, a founder of LCM Asset Management.
    Public and political scrutiny of high-priced medications
could pressure pharmaceutical corporations, for example.
Hospital companies, on the other hand, could benefit from an
aging population and growing medical needs, most investors and
strategists agree.
    "The essential service component of hospitals has always
been a good protector against unreasonable actions in the past,"
said Tavangar. "[However] we're a little worried about
diagnostics and reimbursements for diagnostics, screening and
imaging companies, particularly if insurance companies approve
fewer medical tests."
    Healthcare loan volume overall could end the year little
changed from last year's total, bankers said, even with current
market trepidation.
    First-quarter lending was off just 6% from a year earlier,
as a surge of refinancing by lower-rated companies to cut
borrowing costs tempered the slump in investment grade deals.
Refinancing may continue to overshadow borrowing for new
transactions.
    A tax holiday that brings corporate cash to the US from
overseas would "incentivize pharma and med-tech companies to go
out and buy assets but not necessarily to make big-bet
transformative acquisitions," Fisher said. "Because the
companies would use cash, it won't necessarily produce a lot
more financing activity."

 (Reporting by Lynn Adler; Editing by Chris Mangham and Jon
Methven)
 ((lynn.adler@thomsonreuters.com; 646-223-6307; Reuters
Messaging: lynn.adler.thomsonreuters.com@reuters.net; Twitter
@TRLPC @lynnadler))

Keywords: HEALTHCARE LENDING/



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