Earn A Seven Percent Yield With BioPharma Credit

For many investment trusts 2022 was a year to forget, but that was certainly not the case for the $1.4bn BioPharma Credit (LON: BPCR), which was able to declare record distributions for its shareholders. The fund invests in a concentrated portfolio of debt securities issued by biopharmaceutical companies, with the majority being floating rate loans that benefit from higher interest rates.

BioPharma Credit’s main objective is to generate a predictable income for shareholders over the long-term. Its portfolio holdings are backed by royalties or other cash flows derived from sales of approved life sciences products and have withstood the challenges facing the sector over the last few years.

In 2022 BPCR paid an ordinary dividend of seven cents a share along with a special dividend of 6.08 cents, giving a total return of around 15%. The latter was driven by the early repayment of five of its loans that generated attractive internal rates of return of 11.8% to 27.6% for the fund.

These material prepayments have left the trust with a substantial cash balance of $341m – about a quarter of its NAV − to re-deploy, with the goal of full investment being an important challenge for the company. Despite this the fund continues to target an annual dividend of seven cents, putting the shares on a prospective seven percent yield, which the manager expects to be covered by income from the existing portfolio.

Concentrated Portfolio

At the end of January, the fund held ten debt investments with a total value of $1.03bn and a weighted average loan life of 3.7 years. Of this, 90% was invested in senior secured loans with the rest in purchased payments.

Just over 80% of the senior secured loans consist of floating rate debt that is benefitting from the higher interest rate environment, with the fund as a whole generating an attractive gross yield of 11.7%. The equivalent yield in March 2022 was nine percent.

It is clearly a very concentrated portfolio, although the fund manager says that they continue to assess a highly attractive pipeline of potential new investment opportunities. The approach has certainly worked so far, with the fund paying a special dividend over and above its target pay-out of seven cents per annum in five of the six years since launch, with the NAV remaining remarkably consistent.

Impressive Track Record

The broker Numis says that the 2022 accounts were an impressive set of results, with the management team once again demonstrating the strength of their credit underwriting. They point out that we have been through a vicious bear market for biotech stocks, including a much tougher funding environment, yet BPCR was still able to generate strong returns including around 15% of income and gains last year.

BioPharma Credit’s underwriting process is based on the value of the approved drugs supporting the repayment of the loan, meaning that the success of new clinical programmes, which the loans may often be funding, is less significant to the investment case for the debt holder. This is crucial as even the failure of one of the holdings could potentially have a significant impact on the fund.

The broker Investec says that the highly uncorrelated nature of the company’s income streams and defensive characteristics enable it to play a key role in diversifying investor portfolios. Its significant exposure to floating rate loans also allows it to benefit from the current higher rate environment, hence their buy recommendation. The shares are currently available on a six percent discount to NAV.