During this session, McDermott Partners Samantha Koplik and Stephanie McCann moderated a panel that provided critical insights for investors to consider when sourcing capital to finance healthcare deals in today’s challenging leveraged loan market.
Session panelists included:
Peter Dahms, Managing Director, Capital Markets, Oxford Finance
Sam Goldworm, Managing Director East Coast Originations and Head of Capital Markets, WhiteHorse Capital
Alex Greeley, Partner, Linden Capital Partners
Bryan Rupprecht, Managing Director and Head of Healthcare, MidCap Financial
Top takeaways included:
Inflation, interest rate hikes and valuation dislocation are some of the biggest challenges facing the leveraged loan market today. As a result of these pressures, there is less capital available and lenders have decreased their hold sizes. One panelist said that loans are increasingly being clubbed together, resulting in higher pricing because “the last dollar in is going to set the price.”
The challenges of 2022 will create strong headwinds in 2023. It was noted that “private markets don’t settle the way public markets do” so it will take some time for seller expectations to lower and for valuations to settle in the private market. As a result, lenders predict there will be less acquisition financing for the next few months, and they will also be more selective about which deals they choose to finance.
Despite the challenges of today’s leveraged loan market, a lot of market terms have remained unchanged. Earnings before interest, taxes, depreciation and amortization addbacks typically remain uncapped, and borrowers are still negotiating for post-closing operational flexibility. However, lenders expect to see credit agreement terms tighten around the margins. One panelist shared that the healthcare space has historically had a lot of flexibility for de novo run rate adjustments and that “over the past six to nine months these have gotten very lax.” They expect to see more pushback on these types of adjustments going forward.
For years, sponsors have modeled their deals on their ability to easily leverage debt, particularly in the add-on context. As multiples increase, incremental financing will become less attractive, and sponsors and borrowers will need to look to junior capital to fill the gap. The panelists noted that bringing in non-cash pay junior capital can be extremely beneficial for sponsors and borrowers, especially when utilizing an incremental would trigger most-favored nations provisions and increase pricing.
Loan market challenges will create a few bumps for healthcare investing, but the industry is expected to remain steady and resilient. “Big picture, healthcare will do well moving forward,” one panelist said. There will, however, be differences between the healthcare sectors, particularly those with large labor components. It was noted that “there’s no cataclysmic event within healthcare,” but investors will need to be smart about selecting sectors and financing structures.