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DRI Capital to issue another $100M of pharmaceutical royalty ABS

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DRI Capital, a Canadian investment firm specializing in managing pharmaceutical drug patents, is marketing $100 million in bonds backed by fee and royalty streams.

Drug Royalty III LP 1 (Series 2018-1) will issue a single class of notes, some fixed-rate and some floating-rate notes with preliminary BBB ratings from S&P Global Ratings and Kroll Bond Rating Agency. Kroll also affirmed the BBB ratings of the 2017-1 series that were also issued by the Drug Royalty III LP 1 master trust. (The 2016 notes were issued from a prior shelf.)

The bonds will be collateralized by payments from 15 royalty streams on 14 patent-protected drugs and technologies, according to presale reports. The new notes, plus the $49.7 million 2016 series and $101.8 million 2017 series, are all supported by credit enhancement that includes 52% overcollateralization, a reserve account of the minimum of six months interest or $1 million, and an excess spread to be determined.

Proceeds will be used for additional product acquisitions that can support future royalty-backed issues from the trust. Goldman Sachs is again serving as bookrunner and lead structuring agent.

The transaction also benefits from an interest rate cap agreement in which Wells Fargo will bear the risk of three-month U.S. dollar Libor exceeding 3.25% (currently at 2.706% as of Nov. 26) on the floating-rate notes.

In addition to overcollateralization, credit protections include the required maintenance of a 2:1 debt service coverage ratio as well as a loan-to-value adjustment mechanism that has a forward-looking cash flow test. The transaction also calls for a third-party sales consultant to ensure royalty payments remain within 15% of sales forecasts in the trailing four quarters.

DRI advises funds that acquire royalty interests in commercial pharmaceutical products. It manages 60 drug royalty streams on the rights to 39 products obtained from inventors, universities, research institutes, hospitals, biotechnology and global pharmaceutical companies, according to Kroll.

DRI has issued over $1.8 billion in debt securities since 2005 across nine securitization transactions. Five of the deals have been retired or refinanced.

Kroll says most of the medications in the collateral pool are market or category-leading drugs treating chronic, critical or rate diseases, including cancers, HIV, spinal muscular atrophy, arthritis, macular degeneration and Crohn’s disease.

S&P notes the portfolio includes drugs that have been on the market for years with an established safety track record. The drugs in the pool are also primarily biologic-based, “which typically face less competition and pricing pressure,” S&P’s report stated. Also, many treat chronic conditions and are purchased on a regular schedule by patients.

But S&P considers the product concentration a high risk in the pool, since royalty streams on three drugs represent 61.5% of the pool’s value, including Johnson & Johnson’s Spinraza (29% of the asset value of the pool), Merck’s Keytruda (21%) and Regeneron’s Eylea (11%).

About 49% of the royalty streams are outside the U.S., including Europe and Japan.

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