One of the best-known patent royalty securitizations, BioPharma Royalty Trust, will likely enter into early amortization following the third quarter trustee report due at the end of November.

Based on projections associated with Bristol-Myers Squibb Co.'s financial statements and reports, Standard & Poor's expects BioPharma's $57.15 million A' rated senior notes to breach covenants for the third consecutive reporting period, considered a trigger event per the deal documentation. Cashflow to the mezzanine tranche has already fallen short, with the damage absorbed by ZC Specialty Insurance Co., a subsidiary of Center Re., and guarantor for those notes. The mezzanine tranche, worth $22 million, is rated AA-' based on the guaranty.

At this point, it seems unlikely that debt investors will suffer even a dime of principal loss, though equity investors ($21.16 million) have missed several quarters of payment.

"While the transaction is in an event of default, which from a senior note position can be viewed as a positive because the repayment will continue until the bonds are retired, from a structural standpoint, the deal is working as it should," said Bernhard Fischer of S&P's new asset group.

The deal's history and future was a topic of discussion at S&P's recent New Assets Hot Topic seminar held at the McGraw-Hill offices in New York. S&P is the only rating agency on BioPharma.

In an early amortization, the senior notes should be paid down by first quarter 2005. The notes have a legal final maturity of second quarter 2006.

BioPharma priced during the second half of 2000 via WestLB London, and is believed to the first rated pharmaceutical patent royalty securitization. In the transaction, patent holder Yale University securitized the revenue stream associated with D4T, brand name Zerit, an HIV medication which Bristol-Myers licensed from Yale in the late 1980s. Bristol was paying the university a cash stream as a function of the overall revenue that the drug brings in annually.

The mezzanine notes first breached their cashflow covenant in 4Q01, followed by the seniors in 1Q02, at which point the mezzanine suffered a shortfall of about $600,000 in principal and interest made up by the surety. Covenants were breached again for both classes of notes in the second quarter, which technically triggered a rapid pay-down for the mezzanine tranche, although this is less meaningful with the surety in place.

The lower than expected cashflow to the deal is associated with Bristol-Myers selling its entire portfolio at a discount to wholesalers during the second half of 2001. The move was considered an effort to achieve corporate financial benchmarks. As a result, there was a significant slip in sales for the drug during subsequent quarters. Bristol-Myers corporate rating was downgraded by S&P in July of this year, partially as a result of the wholesale inventory issue. The company is currently rated AA' by S&P and was AAA' when BioPharma closed.

"There hasn't been anything related to the drug, its marketplace, or its pricing that would lead us to believe that sales will not return to more favorable levels once the inventory issue is resolved," Fischer said.

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