Trends to Watch in the Loan Market - September 2021

Summary

• Post-COVID, healthcare activity continues at high levels in the U.S. loan market.
• Given the volume of healthcare financings, various developments and trends have emerged in loan documentation for such deals.  As opposed to certain other sectors, not all of these are issuer favorable changes.
• The healthcare industry has also jumped on the SPAC bandwagon causing ripple effects for healthcare related deals in the debt capital markets.
• Following a record year of ESG financings, healthcare issuers are beginning to issue sustainability-linked loans, in some cases, tied to industry-specific key performance indicators.
• Taking stock of healthcare specific changes in the loan market is especially critical given continuing uncertainty about regulatory priorities related to post-COVID delays in appointing key officials such as the FDA Commissioner.

Overview

The events of 2020 and onward (pandemic related and beyond) have brought healthcare activity to the forefront in the loan market, with issuers, lenders and investors eager to get a piece of the action. Given the current abundance and accelerated pace of many healthcare deals, successful healthcare financings require both keen insight into the debt capital markets and careful consideration of critical issues in the healthcare industry. In light of the rise of digital healthcare companies, the evolution of healthcare specific deal terms and other changes in the loan market generally, tackling a healthcare finance deal successfully requires not only tracking trends, but also proactively handling key developments when structuring deals and drafting documents.

1. Spotlight on Recent Healthcare Developments and Trends in the Loan Market
   
   With healthcare-related financings on the rise in 2020 and 2021, some new healthcare-specific terms have developed in the loan market.  Perhaps also taking into account the recent uptick in healthcare legislative and regulatory activity, healthcare-focused credit agreement representations and warranties and affirmative covenants for such borrowers have become more expansive in scope, often covering any and all healthcare laws, regulations, licenses, permits, etc. which are or may be applicable to such borrower. Additionally, a new healthcare focused “Material Regulatory Event” construct has gained traction in the loan market, particularly for pharmaceutical companies. This construct triggers an event of a default (potentially accelerating the obligations) if certain adverse healthcare regulatory events occur that result in (or could reasonably be expected to result in) penalties and losses beyond threshold amounts for the borrower. Credit facilities that include this term, use it in addition to the normal Material Adverse Change / Effect provisions. These terms prophylactically counteract adverse regulatory and other impacts that could inhibit the borrower’s ability to perform as required by the terms of its loan documentation.
    
2. How the SPAC Boom is Impacting Healthcare Financings
   
   Special Purpose Acquisition Companies (SPACs) have become a feature in the debt capital markets from 2020 onward.  Healthcare has jumped on the SPAC train, particularly in the realm of digital health companies, which have experienced their own meteoric rise, heightened in large part by COVID-related shut downs. For healthcare companies, SPACs facilitate streamlined initial public offerings (IPOs) and business combinations by ostensibly reducing costs and timelines. Recent SPAC IPOs, and other combinations in the healthcare industry, have primarily focused on healthcare tech companies, including digital health services companies, and have also included pharmaceutical and biotech companies. If a healthcare borrower with an existing credit facility goes public through a SPAC IPO or engages in another SPAC transaction, it may refinance its existing credit facilities or need to amend its existing documentation to account for its new public company status, including its new public reporting obligations, financial tracking and market capitalization. To provide high performing healthcare borrowers with such flexibility to grow their businesses, SPAC-related terms, permitting specific SPAC transactions or providing broad permission for healthcare borrowers to engage in effective changes of control through SPAC combinations and / or IPOs, have started to appear in some healthcare credit facilities.
    
3. ESG Lending – A New Treatment in Healthcare Finance
   
   2021 has seen record levels of Environmental, Social, and Governance (ESG) activity in the loan market, particularly with respect to sustainability-linked loans in the U.S. Although the bulk of such issuances have involved real estate related borrowers and--to some extent--certain manufacturers outside of the healthcare space, healthcare issuers are beginning to look to sustainability-linked loans to reap the potential pricing rewards for supporting ESG-related improvements. Unlike other issuers whose sustainability-linked key performance indicators (KPIs) have focused on reductions to greenhouse gas and carbon emissions in order to achieve pricing reductions, healthcare borrowers have instead included ESG pricing ratchets based on ESG scores, focused on enterprise-wide sustainability improvements, as well as increasing equitable distribution to the public of healthcare products (including pharmaceuticals and medical devices) and services. As ESG facilities in the healthcare space are still relatively new, with less consensus on KPIs and related monitoring, some market participants have instead opted to build in ESG amendment mechanics, so that they can add in sustainability-linked pricing adjustments based on to-be-agreed KPIs down the line.
   
   For more information on ESG activity in the loan market please see “ESG – The Carrot or the Stick?”
    
4. Post-COVID Delays in Appointing Key Officials
   
   To date, the Biden Administration has not nominated anyone to serve as the Commissioner of the FDA. Dr. Janet Woodcock, an FDA career official since 1986, has served as the acting FDA commissioner since President Biden’s inauguration. Notably, there is a 210-day statutory limit in terms of how long an acting agency commissioner may work in a Senate-confirmed role. Given this, Acting Commissioner Woodcock is eligible to serve as acting commissioner until November 15th unless President Biden nominates a candidate, in which case she can remain in charge of the FDA during the pendency of the nomination.
   
   The agency’s lack of a permanent leader has stymied FDA’s ability to create and develop new strategic initiatives, including ones relating to two public health emergencies: the COVID-19 pandemic and the opioid epidemic. The ongoing leadership vacancy has garnered the attention of many lawmakers, including Senator Joe Manchin (D-WV). In June, Senator Manchin wrote a letter to President Biden, imploring him to nominate an FDA commissioner to instill a permanent, Senate-confirmed head at the agency to set an agenda to address public health challenges such as the continued response to the COVID-19 pandemic, as well as the opioid crisis. Currently there is opposition and controversy surrounding Dr. Woodcock’s candidacy, so many predict that President Biden may choose another nominee to lead FDA; regardless, the nominee will serve a critical role in determining the key regulatory priorities and areas of focus within the Biden Administration. Healthcare lenders engaging in transactions involving FDA-regulated companies will want to be mindful FDA’s new leader and how they may shape the agency’s future regulatory priorities.