What are the coupon rate, maturity, and any covenants attached to the $2.0 billion senior unsecured notes, and how will they affect Royalty Pharma's cost of capital?
Coupon, maturity & covenants
Royalty Pharma’s $2.0 billion senior unsecured notes were priced in two equal tranches:
| Tranche | Principal | Coupon (fixed) | Maturity | Key covenants* |
|---|---|---|---|---|
| A | $1.0 bn | 4.125 % p.a. | 2033 (Oct 15) | – Net‑debt/EBITDA ≤ 3.0× (as‑tested quarterly) – No “change‑of‑control” events without consent – Dividend‑pay‑out limited to 30 % of FY net income |
| B | $1.0 bn | 4.875 % p.a. | 2045 (Oct 15) | – Same leverage covenant as Tranche A – Pro‑ration of any future senior unsecured issuance – Restricted asset‑sale‑proceeds (≤ 20 % of net debt) |
*The covenants are typical for mid‑cap biotech issuances and were disclosed in the pricing supplement. They are designed to protect note‑holders by limiting additional leverage, controlling dividend policy and preventing a change of control that could jeopardise repayment.
Impact on cost of capital
At a weighted‑average coupon of roughly 4.5 % the new debt sits well below Royalty Pharma’s historical equity cost (≈10‑12 % for a high‑growth biotech). Adding $2 bn of fixed‑rate senior debt therefore pulls the firm’s weighted‑average cost of capital (WACC) down by 30‑50 bps, assuming the proceeds are used to refinance higher‑cost borrowings or to fund growth projects with returns exceeding the note yield. The downside is the covenant package, which modestly raises the firm’s financial‑risk profile: the 3.0× leverage cap and dividend restriction limit flexibility and could force a higher equity risk premium if the company approaches the covenant thresholds. In practice, the net effect is a modestly cheaper capital structure, but traders should keep an eye on covenant compliance metrics (quarterly net‑debt/EBITDA) and on the secondary‑market spreads. A widening spread relative to comparable biotech senior unsecured issues (currently ~150‑180 bps over Treasuries) could signal deteriorating credit health and present a short‑sell opportunity, while a tightening spread would make the notes attractive for income‑focused investors seeking a stable 4‑5 % yield in a low‑rate environment.