Banks sell loans for Apollo-owned Covis after 5-week struggle

A Barclays sign hangs outside a branch of the bank in the City of London. Banks led by Barclays have lost millions of dollars of their own money plus wiped out fees from underwriting more than $1.2bn of bonds and loans for Covis Pharmaceuticals that proved particularly hard to sell.

Banks led by Barclays Plc have lost millions of dollars of their own money plus wiped out fees from underwriting more than $1.2bn of bonds and loans for Covis Pharmaceuticals Inc that proved particularly hard to sell. The banks were already stuck with more than $300mn of loans to the company that they couldn’t sell, and have now sold another $945mn of loans at a steep discount to face value, according to people with knowledge of the matter. The weak demand for the company’s debt is enough to erase more than $20mn of underwriting fees that banks also including HSBC Holdings Plc and Mizuho Financial Group Inc were due to receive on the deal, plus pile on additional losses for the banks beyond that.    The loss is the latest sign that borrowing is getting a little harder for some companies as the Federal Reserve and other central banks globally prepare to tighten the money supply. Although banks have been minting money since 2020 from underwriting bonds and loans during a period of ultra-low interest rates, the easy money there may be coming to an end. A series of sales have been withdrawn recently, including two European offerings on Friday. In the case of Covis, banks are on the hook for the financing deal they offered last year to the company, owned by Apollo Global Management Inc: They agreed to essentially backstop the sale of bonds and loans in case investor demand was too tepid, known as an underwritten deal, according to the people. Selling the Covis debt was tough because investors view the cash flow from some of the company’s biggest drugs as relatively unpredictable, as the products face headwinds like competition from generics.   Other banks facing losses on the deal include Mitsubishi UFJ Financial Group Inc, BNP Paribas SA and Royal Bank of Canada. Representatives for Barclays and Apollo declined to comment. Spokespeople for HSBC, Mizuho, MUFG, RBC, and BNP Paribas declined to comment. Covis didn’t immediately respond to request for comment. Underwritten deals are the most lucrative part of leveraged finance, which has accounted for nearly a third of investment banking revenues in the past. But these transactions are risky too, forcing banks to put their own money on the line. Refinancings, in contrast, are usually conducted with no backstop, with banks agreeing to just do their best to find enough buyers at prices that are acceptable to the borrower. To account for the relatively high risk, banks typically earn fees for underwriting a loan equal to about 2% to 2.5% payment of the entire debt sale. If the Covis deal had gone as planned the banks would have received a combined fee of more than $20mn, according to one of the people. Selling the financing to investors has been a drawn-out process, and originally included a bond sale that was later turned into more loan debt.   As part of an underwriting agreement, the banks will usually agree to absorb losses if loans or bonds are sold below a certain price. In the case of Covis, that level was 93% of face value, a level that underwriters went below on Friday, when they sweetened pricing on loans to 90% for both dollar- and euro-denominated debt, according to the people. Those loans were first-lien, meaning they have the first priority to be repaid if the company falls into bankruptcy, while the more than $300mn of loans the banks were already stuck with were second lien. The first-lien loans sold on Monday included a $595mn portion and a euro-denominated portion equivalent to $350mn. On Tuesday, dealers were willing to buy the dollar debt at 90 cents on the dollar, and sell it at 93 cents, according to people with knowledge of the deal.     As the financing floundered, Covis borrowed a bit more and used the proceeds to partially pay the cost of selling the loan at such a heavily discounted price, which mitigated losses for the banks. That boosted the drugmaker’s total debt sale, bringing the borrowing package to around $1.26bn, according to people with knowledge of the deal. Covis makes drugs including products preventing asthma attacks and treating iron deficiencies, according to Moody’s Investors Service. Investors have been concerned that the company which generates more than 60% of its revenue from three pharmaceuticals that each face headwinds, such as facing competition from generics or potentially being taken off the market by regulators, according to the people. The debt package is helping finance Covis’s acquisition of products from AstraZeneca and is refinancing existing debt.