Like Hamlet's sorrows, defaults tend to come in battalions
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BioPharma Credit offers a tempting yield, but the dangers may be high when the credit cycle turns
Having raised $762m in its stockmarket debut in early 2017, BioPharma Credit (LSE: BPCR)went on to raise another $154m in December and $164m in April, taking the total to well over $1bn. Admittedly, half of the initial money came from existing investors in a private fund who converted their holdings into listed shares, but that still makes this one of the biggest cash raisings in the investment-funds sector in recent years.
BioPharma Credit, as the name implies, lends money to the life-sciences sector. It invests in "corporate or royalty debt secured by the cash flow derived from the sale of approved life-science products", but up to 35% of the portfolio can be unsecured. The firms it lends to may still be lossmaking and so would struggle to raise conventional debt from banks or investors, but anticipate a significant increase in cash flow, perhaps from new products.
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For the companies that borrow, this is very expensive capital, implying that the loans are risky. Yet Perfall doesn't see this as risky "unless you don't know what you are doing". The managers, Pharmakon Advisors, have invested $2.3bn since 2009 in 30 transactions and have suffered no defaults or re-pricings, he points out. This is encouraging, but these have been good times for credit. As Claudius warns in Hamlet, "when sorrows come, they come not single spies but in battalions". One day, the risk implied by these high returns may be all too apparent.
The loans are for between five and seven years, but BPCR is looking to be repaid early. Proceeds from repayment would then be recycled into new loans, subject to BPCR's continuation votes. Loans are typically for less than half the appraised value of a new product, but the portfolio is concentrated, with up to 30% invested in a single credit.
Of the initial amounts raised, $339m was invested in a seed portfolio of already acquired assets. Further investments have reduced the cash to $149m, but two investments account for nearly half the assets and four for nearly 75%. The largest is the $322m committed to oncology-focused biotechnology company Tesoro. Its main product was approved last year in the US and the EU. If predicted sales figures are achieved, the loan will probably be repaid early. In April, $194m was committed to private pharma firm Sebela the loan appears to have been taken out to fund an acquisition.
Reckless borrowers?
The 7% yield looks attractive, but the dividend outlook isn't certain. Future loans could be at lower returns as easily as higher ones (implying a dividend cut) unless the fund takes on riskier loans. Overall, investors would do well to remain cautious.
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Max has an Economics degree from the University of Cambridge and is a chartered accountant. He worked at Investec Asset Management for 12 years, managing multi-asset funds investing in internally and externally managed funds, including investment trusts. This included a fund of investment trusts which grew to £120m+. Max has managed ten investment trusts (winning many awards) and sat on the boards of three trusts – two directorships are still active.
After 39 years in financial services, including 30 as a professional fund manager, Max took semi-retirement in 2017. Max has been a MoneyWeek columnist since 2016 writing about investment funds and more generally on markets online, plus occasional opinion pieces. He also writes for the Investment Trust Handbook each year and has contributed to The Daily Telegraph and other publications. See here for details of current investments held by Max.
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