The Refinancing Landscape for Biopharma Royalty Funds

In a high-interest-rate environment (U.S. Fed Funds ~5.25–5.50% in 2024), traditional biotech funding has pulled back sharply (VC investment in life sciences fell ~60% from 2021 peaks) while royalty financing has surged ~45% annually.

The appeal is clear: royalty deals offer non-dilutive capital backed by contractual cash flows, attracting new pools of investors even as equity markets and venture debt remain challenging. According to recent surveys, 87% of biopharma executives now consider royalty funding a key financing option (up from ~32% in 2019).

Amid this boom, royalty investment funds – both public and private – are actively refinancing their capital structures. They are tapping a diverse range of financing sources (from insurance companies and pension funds to hedge funds and banks) and employing innovative instruments (multi-tranche bonds, revolving credit facilities, synthetic royalties, convertible notes, preferred equity, etc.) to lower their cost of capital.

These refinancings are enabling funds to continue acquiring drug royalty assets at scale and on favorable terms, even as interest rates rise.

Public Royalty Funds and Their Refinancing Strategies

Royalty Pharma: Investment-Grade Scale and Multi-Tranche Bond Issuances

Royalty Pharma (Nasdaq: RPRX) is the largest player in the sector, with over $15 billion in assets and a market cap around $20 billion. It achieved investment-grade credit ratings (Moody's Baa2 / S&P BBB-) at its 2020 IPO, which significantly lowered its cost of debt. Royalty Pharma's refinancing strategy centers on tapping the public bond markets for large, long-duration financing at low fixed rates:

September 2025 Landmark Bond Offering

Royalty Pharma issued $2.0 billion of senior unsecured notes in a multi-tranche offering. The deal comprised:

This capital raise – with maturities spanning 8, 12, and 30 years – locked in fixed rates out to 2055, insulating Royalty Pharma's balance sheet from future rate volatility. The offering was rated BBB- by Fitch, reflecting the strong cash flows of Royalty Pharma's diversified royalty portfolio.

Demand was exceptionally high (reportedly multiple times oversubscribed), indicating institutional investors' appetite for the secure, long-term yields backed by drug royalties. Notably, different tranches appealed to different investor bases: the 30-year bonds were bought largely by life insurers (matching long-duration liabilities), the 12-year by pension and sovereign wealth funds, and the 8-year by asset managers including European insurers.

By raising $2B at coupons of 4.45–5.95%, Royalty Pharma demonstrated it can access capital far more cheaply than smaller peers (many of whom face high-single to double-digit debt costs).

Evolution of Financing Strategy

Over the past decade, Royalty Pharma has progressively refinanced bank loans into bonds and expanded its sources of capital. For example, at its IPO in 2020, Royalty Pharma issued $6.0 billion of notes with an unprecedented six tranches ranging from 3-year to 30-year maturities at coupons of 0.75%–3.55%. This slashed its weighted average interest rate from ~6.5% (on prior bank loans) to ~2.1%, saving over $220 million in annual interest.

The company's ability to refinance into low-cost, long-term debt has given it a cost-of-capital advantage that allows aggressive growth. As CEO Pablo Legorreta noted, obtaining investment-grade financing created an "acquisition currency" – with cheap debt and public equity, Royalty Pharma could pursue much larger royalty acquisitions. Indeed, in 2021–2022 it deployed $7+ billion on new royalty assets. Royalty Pharma's total debt stood at ~$8.2 billion as of Q3 2024 at a weighted average cost of only ~3.1% – extraordinarily low for the biotech sector. This reflects both its investment-grade rating and the securitized nature of its royalty cash flows (which are diversified across 35+ commercial drugs).

Financing Sources

Royalty Pharma's debt investors are primarily large institutions with long-term mandates. Insurance companies, pension funds, endowments, and sovereign wealth funds all participate heavily in its bond offerings. For example, European life insurers seeking USD assets anchored the ultra-long 2055 notes. Royalty Pharma has leveraged global distribution via major investment banks to broaden its creditor base to over 200 investors across North America, Europe, Asia, and the Middle East.

This global investor reach further lowers its cost of capital. Royalty Pharma's credit rating (BBB-/Baa2) is a key enabler here – many insurers and SWFs have mandates to buy only investment-grade debt, so Royalty Pharma's rating opens access to these deep pools of capital. Even central banks and ultra-conservative funds have bought its high-grade notes.

In short, Royalty Pharma's refinancing model is to issue bonds at scale under an SEC shelf registration (the September 2025 notes were issued off an effective shelf) and use the proceeds for general corporate purposes (new acquisitions, debt repurchases, dividends). By continually terming out debt at fixed rates when market windows are favorable, it has created a fortress balance sheet relatively immune to short-term rate swings.

DRI Healthcare Trust: Mid-Market Flexibility with Bank Debt and Preferred Equity

DRI Healthcare Trust (TSX: DHT.UN) is a $1.8 billion market-cap royalty fund based in Toronto. Unlike Royalty Pharma, DRI does not have public bonds or ratings; instead it employs a hybrid approach utilizing bank credit facilities and structured equity to refinance its capital:

Secured Credit Facility (Bank Syndicate)

In November 2024, DRI upsized its secured credit facilities to US$631.6 million, comprising a revolving credit line and term loan. The facility is first-lien secured by DRI's entire royalty portfolio and key assets. The syndicate of top-tier banks (led by CIBC and RBC as arrangers, joined by BofA, JPMorgan, Scotiabank, TD, etc.) provided DRI an extended maturity to Nov 2027.

Importantly, DRI was able to reduce its interest margin by 0.25% in this refinancing, due to maintaining a conservative leverage ratio. The facility's pricing is floating rate (SOFR + a spread tied to leverage); based on disclosures, drawn debt costs roughly SOFR + ~1.75–2.75% for DRI – equating to ~6–8% currently. While higher than Royalty Pharma's bond rates, this is still a relatively low cost for an unrated entity, thanks to the robust collateral.

The credit agreement also includes flexible features:

• Multi-currency borrowing capability (USD, CAD, EUR, GBP) to naturally hedge international royalties
• A "borrowing base" tied to the appraised value of royalty assets (ensuring leverage remains proportional to collateral)
• A springing maturity extension if certain refinancings or asset sales occur (reducing near-term refinance risk)

Covenants enforce discipline (e.g. max leverage ~4.0×, minimum quarterly EBITDA ~$55M), but are calibrated to DRI's high-margin cash flows. Overall, the facility gives DRI a flexible, scalable debt backbone – it can draw revolver funds to quickly finance new royalty purchases, then term out or repay as cash flows come in. As of late 2024, DRI had nearly $300M undrawn on the facility available for deployments.

Preferred Equity Refinancing

In April 2024, DRI executed a creative refinancing of its preferred securities to strengthen the balance sheet without common equity dilution. It exchanged $114.76 million of older Series A & B preferred units (which carried high coupons and came with 6.37 million warrants) for a new Series C preferred issuance of ~$135.2 million.

The Series C preferreds were structured as unsecured subordinated notes maturing in 2074 (50-year tenor) with an initial cash interest of 7.50% for the first five years. After April 2029, the rate steps up to 10% if any prefs are still outstanding, with further annual 1.5% increases thereafter (capped at a certain point). This step-up coupon incentivizes DRI to redeem or refinance the prefs before the rate escalates too much (effectively a ticking cost of capital).

Crucially, the transaction massively reduced potential dilution: DRI retired the 6.37 million in-the-money warrants attached to the old prefs and issued only 1.75 million new warrants with a higher strike price (US$15.00, ~20% premium to the pre-announcement unit price). This cut the warrant overhang by ~4.6 million units, reducing potential common share dilution by 8.2% of outstanding units.

The new warrants have a 5-year term and an exercise price of $15, meaning they only dilute shareholders if the stock appreciates significantly (a trade-off DRI was willing to make).

In effect, DRI obtained quasi-permanent capital at 7.5%, which is cheaper than issuing new common equity (cost of equity likely higher) or straight debt (DHT's unsecured debt might cost 10%+ if it attempted high-yield bonds).

Rating agencies also tend to give some equity credit to such preferreds, improving leverage ratios. By deferring any mandatory repayment to 2074 and keeping cash coupons moderate, DRI improved its near-term cash flow and solvency profile. Management noted this preferred refinancing accomplished multiple goals: lowering the trust's weighted cost of capital, preserving cash (no immediate redemption needed), and appeasing investors by removing the dilutive warrant overhang.

Performance and Capacity

DRI's ability to refinance on these terms has been underpinned by strong portfolio performance. As of Q3 2024, DRI's royalty receipts and cash earnings were growing ~45–60% year-on-year, with Adjusted EBITDA margins above 80%:

Such robust cash flow coverage gives lenders confidence that DRI can service its debt comfortably (interest coverage is high) and continue paying its healthy distribution to unitholders. DRI has guided to $180M+ royalty income in 2025, which, if achieved, supports further debt draws or new financing.

In summary, DRI's mid-market refinancing playbook relies on leveraged loans from banks and structured equity to optimize capital. It keeps debt secured and covenant-heavy to attain reasonable interest rates, and uses equity-like instruments to avoid diluting common shareholders while shoring up capital. This strategy has enabled DRI to deploy over $900M since its 2021 IPO across 25+ royalty acquisitions, and management targets reaching $1.25B deployed by end of 2025 with existing financing capacity.

Ligand Pharmaceuticals: Convertible Bonds for Ultra-Low Cost Capital

Ligand Pharmaceuticals (Nasdaq: LGND) is a unique case – a hybrid biotech and royalty aggregator (market cap ~$1.5–2 billion) that has used convertible debt to refinance cheaply. Rather than traditional loans, Ligand raised capital through an equity-linked bond, effectively arbitraging investor optimism in its stock:

August 2025 0.75% Convertible Notes

Ligand issued $460 million of Convertible Senior Notes due 2030 with an incredibly low coupon of 0.75%. Initially announced as $400M, strong demand led to upsizing to $460M (including the underwriters' overallotment). The notes carry a 5-year maturity (due August 15, 2030) and are unsecured.

Investors were willing to accept just 0.75% annual interest because of the generous equity upside: the notes are convertible into Ligand common stock at a conversion price ~ $294.02/share (a 100% premium over the ~$147 share price at issuance). In other words, the conversion premium was about +100% – far higher than typical 30–40% premiums on converts – reflecting bullish sentiment on Ligand's future.

To achieve this, Ligand entered into concurrent hedge and warrant transactions: it spent ~$45.9M on a call option hedge to effectively raise the conversion price, and issued warrants at $294 strike (receiving premium).

This structure (common in convert issuances) allows Ligand to offset dilution up to a share price of $294 – above that, warrant dilution would occur, but by then the company's stock value would be double. Ligand also used $15M of the proceeds to repurchase 102,034 shares at $147 each, signaling confidence and mitigating some dilution.

Net, the company raised ~$445M cash after fees and only minimal near-term interest expense (~$3.45M per year). Management estimated the "implied all-in cost" of this financing (factoring the eventual dilution if converted) at only ~3.8% per annum – still extremely attractive.

Rationale

For Ligand, which is unrated and mid-sized, issuing straight debt would likely have cost 6–8% or more. The convertible route provided near-equity-cost capital at 0.75% cash cost, essentially letting equity-oriented investors subsidize the financing in hopes of stock upside.

The trade-off is potential dilution: if Ligand's stock rises above the ~$294 effective conversion price in coming years, bondholders will convert and Ligand would issue ~1.56 million shares (at $294, or more if price higher) – but thanks to the call spread hedge, dilution is deferred until that high threshold.

At a more moderate upside (say +50%), the bonds likely remain debt, so Ligand might just repay or refinance in 2030 with minimal dilution.

This risk-sharing with investors allowed Ligand to confidently raise a large sum to fund growth initiatives. The market's reception (oversubscribed deal) indicates investors had optimism in Ligand's royalty portfolio and pipeline, valuing the chance to participate in stock appreciation.

Use of Funds & Complementary Credit Line

Ligand made clear it would use the ~$445M net proceeds for strategic expansion – e.g. acquiring new royalties or companies. In fact, Ligand has been deploying capital aggressively: in February 2025, Ligand led a $75M royalty financing for Castle Creek Biosciences (a gene therapy developer), committing $50M itself and syndicating $25M to co-investors including XOMA.

That deal targets a 15–20% IRR on royalties from a Phase 3 therapy, illustrating Ligand's model of using low-cost capital to invest in higher-return assets.

To ensure liquidity for such deals, Ligand also expanded its secured revolving credit facility in late 2024 from $75M to $125M. This bank credit line (with Citibank as agent) carries interest of SOFR + 1.75–2.50%, backed by a borrowing base (85% advance rate on eligible royalties).

Covenants were light (e.g. minimum $50M liquidity, max leverage ~3×). Essentially the revolver serves as "dry powder" for short-term needs – Ligand can draw to fund an acquisition quickly, then repay with cash flows or by issuing another bond/convert later.

With the 0.75% convert and the ~6% cost revolver undrawn unless needed, Ligand achieved a robust financing capacity. This allowed it to "play above its weight" and compete for deals that historically only larger funds could do.

The risk, of course, is that if Ligand's investments don't pay off, it still must cover the debt service or eventual redemption of the convert (unless the stock soars and converts to equity). But given Ligand's focus on revenue-generating or late-stage royalty assets, it has managed the risk prudently.

In sum, convertible debt has been a key refinancing tool for Ligand to minimize its cost of capital while pursuing growth. Its August 2025 convert deal stands out as one of the lowest-coupon biotech converts in recent memory, highlighting how strong capital markets appetite (even in a high-rate year) can be harnessed with the right structure.

XOMA: Securitized Royalty Loan (Blue Owl Capital) for Non-Dilutive Funding

XOMA Corporation (Nasdaq: XOMA), a smaller royalty holding company (~$300M market cap), provides a case study in asset-backed refinancing. In December 2023, XOMA entered an innovative deal with Blue Owl Capital's credit arm to borrow against a single royalty asset:

$140M Non-Recourse Royalty-Backed Loan

XOMA raised up to $140 million in a non-dilutive, non-recourse financing from funds managed by Blue Owl, secured solely by XOMA's royalty interest in the drug Vabysmo. Vabysmo (faricimab) is a blockbuster eye drug (for wet age-related macular degeneration and diabetic macular edema) developed by Genentech/Roche. XOMA had earlier acquired a portion of Vabysmo's royalties for $14M in 2021.

Blue Owl effectively underwrote the future Vabysmo royalties and provided XOMA with a large upfront sum. Key terms of the deal include:

• (a) $130M initial draw at closing, with an option for XOMA to draw another $10M if Vabysmo sales exceed certain thresholds by 2026
• (b) A fixed interest rate of 9.875% per annum, with semi-annual interest-only payments
• (c) An amortization schedule up to 15 years, where the loan will be repaid over time from the royalty receipts (the loan has a final maturity in 15 years, but XOMA can prepay at any time without penalty)
• (d) Collateral & non-recourse structure – Blue Owl's only security is the Vabysmo royalty stream itself, and it has no claim on XOMA's other assets or equity if the royalty underperforms

In addition, Blue Owl received warrants for 120,000 XOMA shares in three tranches with strike prices of $35, $42.50, and $50 (representing 122%, 170%, 217% premiums to XOMA's stock at the deal time). These warrants give Blue Owl extra upside if XOMA's equity appreciates strongly (which could happen if Vabysmo sales boom or if XOMA's portfolio grows).

Analysis

This financing is essentially an asset-backed security (ABS), privately negotiated. By ring-fencing a single royalty, it allowed XOMA to borrow at 9.875% fixed. While ~9.9% is a high interest rate in absolute terms, for context XOMA's own cost of equity capital is likely >15–20%, and traditional debt might have been unavailable or very expensive for an unprofitable small-cap company. So this deal delivered cheaper capital than equity, without dilution, and fixed the rate to avoid floating-rate risk.

For Blue Owl, the attraction was Vabysmo's strong fundamentals: the drug launched in 2022 and quickly reached $2.7B sales in 2023, with ~$3.8B expected for 2024 and analysts projecting $5B+ by 2025. Vabysmo could potentially peak at $8–10B annually later in the decade. This robust growth means the royalty (a mid-single-digit percent of sales) should generate substantial cash flows.

Blue Owl likely modeled that even after paying 9.875% interest and principal, there is significant excess spread – plus the warrants provide equity-like upside if XOMA's stock rises (perhaps as royalties accumulate). Essentially, Blue Owl is betting on Vabysmo's success and structuring the loan such that debt service comes out of those royalty payments.

The deal is mutually beneficial: XOMA gets cash to deploy into more royalty acquisitions or share buybacks, and Blue Owl earns a high yield tied to a high-quality pharma asset. Notably, the financing was described as "non-recourse" and off-balance-sheet to XOMA's other creditors – meaning if Vabysmo sales disappoint drastically, XOMA could default on the loan and Blue Owl's only remedy is to seize the remaining royalty (they cannot force XOMA into bankruptcy).

This kind of self-contained risk is attractive for XOMA's corporate health.

It's an example of how smaller royalty players can leverage a single marquee asset to raise capital in ways that banks (who usually want full recourse) might not accommodate. It also foreshadows the possibility of broader royalty securitizations: in concept, multiple royalty streams could be bundled into an ABS with tranches rated from AAA to high-yield. While no multi-asset public ABS has been done in biopharma to date, the XOMA-Blue Owl deal is a step in that direction – a tailored ABS sold to one sophisticated credit fund.

Outcome

XOMA indicated it would use the $130M proceeds for shareholder value initiatives like stock repurchases and acquiring additional royalties/milestones. By early 2024, XOMA indeed increased its share buyback program. The deal underscores that even for sub-$500M companies, there are refinancing options beyond dilutive equity raises – if they hold attractive royalty collateral.

As interest rates climbed in 2023, such royalty-backed loans emerged as a lifeline for smaller firms to continue funding growth. XOMA's stock traded up on news of the financing, as investors appreciated the non-dilutive capital influx and the external validation of Vabysmo's value.

BioPharma Credit PLC: Permanent Capital Vehicle Funding Biopharma Loans

BioPharma Credit PLC (LSE: BPCR) is a UK-listed investment trust that provides debt financing to biopharma companies, effectively acting as a royalty/credit fund. It deserves mention as a public vehicle (externally managed by Pharmakon Advisors) dedicated to deploying capital into royalty-backed loans and credit facilities:

Structure

BioPharma Credit operates with a permanent capital base (net assets ~$1.15 billion as of mid-2025) raised from institutional and retail investors on the London Stock Exchange. It does not typically borrow heavily itself; rather, it recycles its equity capital into a portfolio of high-yield loans to pharma/biotech companies, often secured by royalties or other assets.

The fund targets an annual dividend yield (historically ~7–8%) to shareholders, funded by the interest and fees from its loan investments. This structure makes it akin to a specialty finance company or BDC focused on life sciences.

Refinancing Activities

In the first half of 2025, BioPharma Credit deployed $144.2 million in new loans, including a $104.2M refinancing for Evolus, Inc. and additional fundings like $25M to Paratek Pharmaceuticals and $15M in Alphatec convertible notes. These deals illustrate the fund's role in providing credit to companies that might have existing royalty or debt obligations.

For example, Evolus (a aesthetics biotech) had an older loan facility that BPCR refinanced with a new $104M facility (BPCR received $62.5M back from Evolus as part of that refinance in H1). The fund also participated in Paratek's financing (likely related to its antibiotic Nuzyra royalties) and BioCryst Pharma's debt (BioPharma Credit received a $30M prepayment from BioCryst in H1, and BioCryst announced full repayment plans by Oct 2025).

These moves indicate BioPharma Credit is actively refinancing existing loans – either extending maturities or upsizing facilities for clients – in exchange for fees or improved terms.

Investors and Instruments

BioPharma Credit raises its capital from income-oriented investors (pension funds, asset managers, etc.) who are effectively financing these biopharma loans by buying BPCR's shares. The fund itself invests via instruments like senior secured loans, royalty interests (synthetic royalties), and occasionally structured notes.

For instance, after June 2025, BPCR funded a $50M senior secured loan (with an option to increase by $12.5M) to an undisclosed borrower, and $35M in notes of Harrow Health (an ophthalmology company). Its portfolio is diversified across ~25 positions, with the largest exposures as of mid-2025 including royalties or loans to Collegium ($264.6M, pain therapeutics), Insmed ($216.6M, rare disease), and BioCryst ($103.6M).

Many of these are in the form of credit facilities secured by product sales/royalties, ensuring BPCR has collateral. The fund benefits from scale and expertise of its manager (Pharmakon), and it often co-invests alongside other funds (including private BioPharma Credit funds managed in parallel).

While BioPharma Credit itself doesn't issue public bonds, its listed shares trade and it can raise additional equity via placings if needed to fund new deals. It did implement share buybacks in 2025 (repurchasing $50M worth in H1 to address its discount to NAV), which is another form of "refinancing" – returning capital to shareholders when not immediately needed, thus optimizing capital usage.

Significance

BioPharma Credit PLC provides a window into private credit's role in royalty financing. It is essentially a conduit through which insurance companies, endowments, and even retail investors indirectly lend to biopharma companies, in exchange for a steady yield. The fund's ability to refinance and extend loans (like the Evolus case) shows how non-bank lenders can give companies flexibility that banks may not.

BioPharma Credit's cost of capital is the return demanded by its shareholders (high single digits), and it aims to lend at even higher rates. For example, a typical loan might carry interest in the 8–12% range plus fees or an equity kicker, enabling BPCR to cover its dividend and expenses.

As traditional banks pull back from risky biotech credits, funds like BPCR have become crucial financing sources. In 2024–2025, with elevated interest rates, biopharma firms turned to private credit and royalty monetizations to avoid dilutive equity raises. BioPharma Credit's steady deployment pipeline (management expected more opportunities in H2 2025 as new products launch) underscores the growing demand for such refinancing solutions.

Private Royalty Investment Vehicles and Sponsors

HealthCare Royalty (HCRx) & KKR: Private Equity Platform Fueling Royalty Deals

HealthCare Royalty Partners (HCRx) is one of the largest private royalty-focused investment firms, with ~$3 billion under management across multiple funds. In July 2025, global PE firm KKR announced it acquired a majority stake in HCRx, a move that is transforming HCRx's refinancing capacity:

KKR Acquisition (2025)

KKR's investment (terms undisclosed, but likely injecting significant capital) gives HCRx access to KKR's enormous balance sheet and resources. KKR manages over $500 billion in assets globally and owns insurance subsidiaries (Global Atlantic) that manage over $100B of annuity and life insurance portfolios.

With KKR as an owner, HCRx can tap permanent capital and lower-cost funding channels that weren't available in a typical finite-life PE fund structure. For example, KKR can deploy its insurance float into HCRx deals, accepting lower returns (~10–12%) in exchange for steady long-term income.

Previously, HCRx's private funds had target returns in the mid-teens (~15%) to satisfy their LPs (endowments, pensions, etc.). Now, with KKR's backing, HCRx can likely aim for deals in the low-teens or high-single-digit returns, making it more competitive on price.

KKR indicated this partnership will allow HCRx to scale up and offer a "range of capital" to biopharma companies – meaning not just buying royalties, but also providing loans or equity-like funding (leveraging KKR's credit expertise). Essentially, KKR is refinancing HCRx's business model: instead of raising a new $2B fund from LPs, HCRx can use KKR's capital on a deal-by-deal basis or potentially launch a permanent capital vehicle with KKR's sponsorship.

This infusion should lower HCRx's weighted cost of capital from ~12–15% into the ~10–11% range, according to industry observers, because KKR's required returns are lower and debt financing can be used at the management company level.

Historical Financing Evolution

HCRx has already shown an evolution toward more flexible capital pools:

Over time it broadened its LP base from endowments to pensions to sovereign wealth funds, while gradually reducing target IRRs from ~15–18% down to ~12–14% as the asset class matured. In 2024, HCRx took on a credit facility of ~$680M at SOFR + ~3.5% – essentially borrowing at ~7–8% to co-finance deals alongside its equity. This was an early step in using leverage to enhance its funds.

The KKR deal in 2025 represents the next step: potentially unlimited "platform capital" from KKR/Global Atlantic, further bringing down the blended cost of funds. HCRx's CEO Clarke Futch remained at the helm with a significant minority stake, ensuring continuity. All told, HCRx post-KKR can behave more like Royalty Pharma – i.e., draw on permanent capital for large deals – whereas before it was constrained by finite fund lifecycles and higher return hurdles.

Synthetic Royalty Financing – A Key Strategy

One hallmark of HCRx is its "Synthetic Royalty" deals. Rather than only buying existing royalties, HCRx often creates new royalty-like agreements by lending money to a pharma company in exchange for a percentage of future product sales. This is a powerful refinancing tool for companies facing debt maturities or funding gaps.

A prime example is Karyopharm Therapeutics' 2024 restructuring: Karyopharm had a $172.5M convertible note coming due in 2025 with insufficient cash on hand. In May 2024, HCRx led a rescue package where it provided a new $100M senior secured term loan (at SOFR + 9.25%) and helped exchange a portion of the old converts for new longer-dated notes.

In return, HCRx got an amendment to its existing revenue interest agreement with Karyopharm – the royalty rate on Karyopharm's cancer drug Xpovio was adjusted to a flat 7.0% on net sales (down from a tiered up-to-12.5% rate) in exchange for certain prepayments. Effectively, HCRx extended Karyopharm's debt maturities to 2028–2029 and infused new cash, while securing a claim on Xpovio's sales (a synthetic royalty) at a reasonable rate and gaining collateral priority.

This deal allowed Karyopharm to avoid a cash crunch and gave HCRx a structured return that blends loan interest and royalty participation. HCRx has done many such deals – their transaction data shows a steady increase in synthetic royalty deployments from 2020 onward, corresponding with more capital raised:

The average realized IRRs have trended down (from ~18% in 2020 to ~14–15% in 2023) as competition increased and cost of capital fell – but these are still healthy returns for a credit-oriented strategy. Under KKR, HCRx may further expand synthetic royalties, since KKR can fund such deals with lower yield targets. We may also see HCRx package synthetic royalties into securitized products or partner with KKR's credit funds to tranche out risk.

Financing Sources

Before the KKR buyout, HCRx's investors included a who's-who of institutional LPs: by Fund IV, insurers and family offices joined the earlier endowments, SWFs, etc. Post-acquisition, HCRx effectively gains KKR's fundraising machine – for instance, KKR could syndicate parts of large royalty deals to its infrastructure or private credit clients, or involve Global Atlantic (its insurance arm) to take sizeable investment-grade slices (insurers often like long-duration stable cash flows from royalties).

Sovereign wealth funds too may partner on deals – indeed HCRx's 2014 fund had SWFs, and SWFs continue to co-invest in big royalty transactions across the industry. HCRx now sits within KKR's Health Care Strategic Growth platform, meaning it can draw on KKR's sector knowledge and even co-invest with KKR's other healthcare portfolio companies.

In summary, KKR's acquisition refinanced HCRx at the corporate level, replacing expensive private equity capital with cheaper permanent capital and debt, thereby empowering HCRx to offer more competitive financing to biopharma partners. This is a notable trend: large alternative asset managers (KKR, Blackstone, etc.) are incorporating royalty specialists to broaden their life sciences financing offerings.

Blackstone Life Sciences: Mega-Fund Muscle and Insurance Capital in Royalty Deals

Blackstone Life Sciences (BXLS), the life sciences investment arm of Blackstone, has rapidly become a heavyweight in pharma financing, including royalty and credit transactions. While not a traditional "royalty fund" with public reporting, Blackstone manages multiple large funds and leverages its broader platform (especially insurance assets) to fund royalty deals:

Scale and Approach

Blackstone launched its Life Sciences division after acquiring Clarus Ventures in 2018, and since then has executed several headline-grabbing deals. For example, in 2020 Blackstone led a $2 billion funding collaboration with Alnylam Pharmaceuticals, which included buying partial royalties on Alnylam's cholesterol-lowering drug inclisiran and providing a loan facility.

Blackstone often structures deals combining equity, credit, and royalty interests. It raised a dedicated fund (BXLS V) reportedly over $4.5B in 2020, which can invest across product financings, royalties, and company stakes. By 2024, Blackstone was reportedly raising an even larger life sciences fund, aiming to fill what it calls a "$150B funding gap" in the industry.

Unlike smaller royalty funds, Blackstone doesn't need to seek external co-investors – it is the co-investor, bringing in capital from its insurance affiliates and pension fund limited partners for each deal.

Use of Insurance Capital

A distinguishing factor is Blackstone's ability to deploy insurance float into long-term royalty streams. Blackstone acquired an insurance business (from Allstate) and also manages $100B+ from insurers (including reinsurer deals with Resolution Life, etc.).

In May 2025, Blackstone Life Sciences and Blackstone Insurance teamed up to purchase a royalty interest from Elanco – a notable example of how they operate. Elanco Animal Health sold its royalty and milestone rights for an FDA-approved eye drug (XDEMVY) to funds affiliated with Blackstone for $295 million cash.

XDEMVY (lotilaner ophthalmic solution) was the first treatment for Demodex blepharitis, launched in 2023. Elanco licensed it to Tarsus for human use, and chose to monetize the future royalties to pay down debt (Elanco expected to reduce its leverage to ~4× EBITDA with the proceeds). Blackstone's Credit & Insurance arm joined with BXLS to provide the $295M, reflecting that part of the investment likely came from an insurance balance sheet seeking long-term yield.

Morgan Stanley acted as structuring agent, indicating a tailored deal. For Elanco, this was essentially a refinancing: instead of issuing more corporate debt, it sold a non-core royalty for immediate cash – reducing interest expense by ~$10M annually while giving up ~$10M of annual royalty income (per initial guidance). This trade-off made sense to deleverage.

Competitive Deals

Blackstone has shown willingness to bid on large royalty packages. In mid-2025, Revolution Medicines ran a process for a massive funding arrangement to finance its RAS inhibitor programs. Royalty Pharma ultimately won with a $2B offer (including a synthetic royalty + loan), but Blackstone was reportedly among the runners-up, bidding around $1.0B.

Although Blackstone didn't win that deal, its presence forced Royalty Pharma to offer very competitive terms (an estimated ~7.5% royalty plus SOFR+450bps loan component).

Blackstone also participated in 2022's big Royalty Pharma-led deal for MorphoSys' Tremfya royalties (Blackstone and Ontario Teachers' co-invested $300M in that $1.4B transaction).

Additionally, Blackstone has formed collaborations with major pharmas:

• In April 2023, Blackstone announced a €300M financing partnership with Sanofi to accelerate a myeloma treatment's development, where Blackstone committed funds in exchange for milestones/royalties if the drug succeeds.
• In 2022, Blackstone agreed to provide up to $750M to Moderna for its mRNA vaccine development (including milestone-based tranches).

These examples show Blackstone's modus operandi: using bespoke large-scale financings that often combine an upfront payment for a royalty or milestone, plus follow-on commitments.

Implications

Blackstone Life Sciences acts as a private mega-royalty fund, with flexibility to structure deals in many forms. It can issue structured notes or asset-backed loans internally – essentially writing a check from its fund or insurance subsidiary – rather than going to public markets for each deal.

Its cost of capital varies: for lower-risk assets, it might accept mid-single-digit returns (especially for insurance money seeking ~4–6%), whereas for higher-risk development-stage assets it might seek mid-teens. In the Elanco deal, for instance, XDEMVY is a new commercial product with growth potential; Blackstone likely underwrote it to an IRR commensurate with a high-yield bond (perhaps ~10%). For a Phase 3 asset like the Sanofi myeloma project, Blackstone might target a higher return plus milestones.

Blackstone also benefits from synergies: it can bring in expertise from its other investments (e.g. if it owns a stake in a biotech, it could also finance that biotech's partnered royalty). While Blackstone doesn't publicly detail performance, Bloomberg reported Blackstone sees an opening as traditional funding sources retreat, allowing it to deploy billions in life sciences deals.

Overall, Blackstone's activity underscores the trend of large alternative asset managers entering the royalty space, armed with multi-billion-dollar funds and a wide range of capital (equity, credit, insurance) to meet financing needs. This has increased competition for the likes of Royalty Pharma on big-ticket deals, though Royalty Pharma's lower cost of capital has so far preserved its dominance (its market share dipped when Blackstone/OMERS did some large deals in 2022, but rebounded to ~45% by 2024).

Sovereign Wealth Funds and Other Co-Investors: Long-Horizon Capital

Large sovereign wealth funds (SWFs) and pension funds have increasingly become important financing partners in the royalty space, often co-investing rather than originating deals themselves:

Role of SWFs

Sovereign funds (e.g. Singapore's GIC, Abu Dhabi's Mubadala, Kuwait Investment Authority) have enormous pools of capital and long investment horizons, which align well with drug royalties that pay out over decades. However, many SWFs invest opportunistically through separate accounts or sidecar agreements with established royalty funds.

For instance, HCRx Fund III (2014) added sovereign wealth funds as LPs to broaden its capital base. SWFs also sometimes partner on single transactions: it's reported that certain Middle Eastern SWFs have co-funded large royalty purchases alongside Royalty Pharma or others, in exchange for a fixed return plus potential upside. These bespoke deals allow SWFs to deploy capital in size when a suitable asset comes to market, without having to source it themselves.

As an example, in 2019 Royalty Pharma teamed up with the Singapore fund ADIA on a $2.85B purchase of royalties for Johnson & Johnson's diabetes drugs – ADIA likely took a portion. The attraction for SWFs is the stable cash yield (royalties often yield 5–10% cash-on-cash) in a sector uncorrelated with oil or public equities, as well as supporting innovation (which can have strategic or reputational benefits).

They often demand some upside kicker too, such as equity warrants or a residual interest, since they have no shortage of opportunities and can be selective. In general, SWFs only invest in larger, later-stage assets (they typically avoid early-development royalties due to risk).

Pension Funds and Asset Managers

Similar to SWFs, large pension funds (e.g. Canada's CPPIB, Ontario Teachers', Australia's Future Fund) have allocated to royalty deals. Ontario Teachers' Pension Plan co-invested with Royalty Pharma on a $650M royalty for psoriasis drug Tremfya in 2021. These institutions seek long-duration, fixed-income-like returns to match liabilities, and pharma royalties fit the bill – especially when structured as "annuity" streams.

Some asset managers have even created funds targeting this: e.g. Oaktree Capital and TPG have launched healthcare royalty investment vehicles. Insurance companies too are directly investing – beyond just through funds like KKR's Global Atlantic, some insurers have done direct royalty deals or provided credit lines to royalty funds (for instance, in Royalty Pharma's Sept 2025 bond, insurers were major buyers of the 30-year tranche).

Insurers and pensions often prefer investment-grade or de-risked structures (they'll buy a senior tranche of a royalty securitization if it's rated A/AA, for example).

Public Market Investors

A final category is retail and public equity investors who finance royalties indirectly by buying shares of Royalty Pharma, DRI, XOMA, BPCR, etc. For example, XOMA was able to raise equity in late 2022 to fund royalty acquisitions, relying on public markets. And Royalty Pharma's IPO in 2020 converted private capital into permanent equity capital. Thus, equity investors ultimately finance a portion of the royalty asset purchases (in exchange for the growth and dividends these companies provide).

In summary, who provides financing to royalty funds spans a wide spectrum: from global insurers (buying long bonds or investing via KKR/Blackstone vehicles), pension and sovereign funds (co-investing or as LPs, often via structured arrangements), to hedge funds and private credit players (taking on riskier slices like convertible bonds or junior loans), investment and commercial banks (arranging credit facilities and potentially warehousing some loans), and of course the asset managers/retail shareholders in any publicly traded royalty companies.

The how is equally varied – bonds, loans, synthetic royalties, preferred equity, etc., each catering to the risk/return preferences of these capital providers.

Mechanics of Royalty Refinancing Deals

Refinancing transactions in the royalty sector are often complex, with bespoke structures. Here we break down some common mechanics and features, using recent examples for illustration:

Debt Tranching and Tenor

Many refinancings involve tranching debt by maturity or seniority to appeal to different investors. Royalty Pharma's $2.0B bond issue in Sept 2025 is a clear example – it was split into 8-year, 12-year, and 30-year tranches. Shorter tranches (2031 notes) attracted yield-focused investors with a moderate duration, while the ultra-long 2055 bonds appealed to insurance companies needing 30-year assets.

Tranching can also refer to structuring senior vs. subordinated debt. In some deals, a highly rated senior tranche might carry a low interest rate, while a riskier mezzanine tranche (or pref equity) gets a higher return. Although a true multi-tranche ABS (asset-backed security) hasn't been publicly issued for drug royalties yet, it's actively being explored.

The idea would be to bundle a portfolio of royalties and issue, say, AAA-rated notes at ~2–3% (with first claim on royalty cash flows), BBB notes at higher yield, and an unrated equity tranche that the sponsor retains. This would unlock broad institutional capital (pension funds buy the AAAs, etc.). Royalty Pharma essentially did a form of securitization with its 2020 six-tranche bond (spanning 3 to 30 years), and XOMA's Blue Owl loan was a single-tranche ABS with warrants acting as the equity kicker.

Takeaway: Tranching allows optimization of cost – low-risk portions of cash flows get financed cheaply, while higher-risk portions reward junior capital richly. It also extends tenor (30+ year money for royalties that may last decades).

Interest Rates and Cost of Capital

Interest rates on royalty financings vary widely by the borrower's size and the deal's risk:

Smaller or riskier deals (like XOMA's single-asset loan) naturally demand higher interest to compensate lenders. High-quality, diversified portfolios (Royalty Pharma) can secure quasi-investment-grade rates.

It's notable that rising base rates in 2023–2025 did not cripple royalty financings – instead, many funds managed to keep their spreads tight. For instance, Royalty Pharma's 8-year notes in 2025 came at ~160 bps over Treasurys (4.45% coupon when 8-year UST was ~2.85%); its spread only modestly widened from deals done when rates were near zero.

This indicates investors view top-tier royalties as relatively safe. Meanwhile, middle players like DRI faced double-digit rates if they went to high-yield markets, hence they stuck with bank loans and even interest rate swaps to manage costs (DRI swapped $100M of its floating loan to 4.63% fixed in 2024).

The overall cost of capital for the sector has a two-tier nature: large, investment-grade funds enjoy low to mid-single-digit costs, whereas smaller funds or single-asset deals often end up in high-single/low-double digits. This cost gap directly affects competitiveness in acquiring royalties – as Royalty Pharma can afford to pay more upfront for an asset (since it funds at 4%) than a smaller fund that requires a 12% return.

Collateral and Security

Collateralization is a fundamental consideration:

Unsecured debt is feasible when the borrower is large and diversified enough to get a credit rating (e.g., Royalty Pharma's bonds are general corporate obligations, no specific collateral) – it provides flexibility but requires a solid balance sheet.

Secured debt is common for mid-tier and private deals: DRI's credit facility has a first-lien on all its royalty assets; XOMA's loan is secured by the single Vabysmo royalty; BioPharma Credit's loans usually have royalty collateral or IP liens. Secured deals lower risk for lenders – if the borrower defaults, lenders can intercept the royalty streams or seize royalty rights. However, securing a loan may involve borrowing base constraints (as DRI has) and covenants to ensure collateral value remains sufficient.

Another wrinkle is non-recourse vs. full-recourse: non-recourse (like XOMA's) limits lender claims to the collateral only, which is borrower-favorable but thus commands a higher interest rate to compensate lenders. Full-recourse (like DRI's or most corporate bonds) means lenders can go after all assets if not repaid, which allows lower pricing but puts the company at more risk in default.

In some cases, royalty financings are done through a special purpose vehicle (SPV) that holds the royalty; notes are issued by the SPV with no recourse to the parent – effectively a mini securitization. This was the case in some older Royalty Pharma deals and BioPharma Credit's structure for certain loans.

Overall, collateralization is tailored to deal size and investor preferences: banks love collateral (hence DRI's bank loan is secured), whereas public bond investors buying RPRX debt accepted unsecured risk because the company's cash flows are robust and diversified.

Amortization and Payment Structure

Royalties are naturally amortizing assets (the drugs eventually lose patent exclusivity, and royalties taper off). Financing structures can either match this amortization or not:

Bullet maturity debt (e.g. bonds due 2035 with no payments until then) allows the borrower to pay interest only and refinance or pay principal at maturity – this is typical for investment-grade corporate bonds. Bullet structures concentrate refinancing risk in one date but maximize flexibility in the interim.

Amortizing debt requires periodic principal payments, often aligned with royalty receipts. XOMA's 15-year loan has an amortization schedule where royalties collected pay down principal semi-annually over time. Many synthetic royalty loans use a sweep mechanism – e.g. a portion of quarterly sales goes to lender as repayment. This gives lenders comfort that the loan will be repaid as the underlying product generates cash, and reduces risk of a large unpaid principal at maturity.

DRI's facility includes a term loan component that likely has modest amortization or at least a maturity (2027) before the royalty life ends. An interesting concept is tail-end amortization: ensuring debt is fully paid off a couple years before the royalty expiry, leaving a cushion.

We also see contingent amortization – e.g. Blue Owl's $10M extra tranche only becomes available if sales exceed a threshold, effectively tying additional lending to performance (this ensures the loan amortizes faster if sales are higher).

Some deals feature an "accretion" or PIK interest (payment-in-kind) initially, then switch to cash pay once royalties ramp up. For instance, smaller biotechs might negotiate to capitalize interest for a year or two while a product launches, then start cash payments later (this is similar to how some royalty monetizations are structured with deferred payments).

In summary, amortization schedules in royalty refinancings are designed to balance cash flow timing – borrowers prefer interest-only to preserve cash, but lenders often get comfortable through structures that repay principal steadily from the royalty stream.

Embedded Options and Equity Kickers

Many refinancing instruments include embedded options that sweeten the deal for investors or protect the issuer:

Convertible bonds inherently have an embedded call option for investors (to convert debt into equity); Ligand's 0.75% notes gave bondholders the option to share in stock upside beyond a 100% rise. To offset this, issuers may embed call spreads or capped call transactions (as Ligand did, buying a hedge to effectively raise the conversion price and issuing higher-strike warrants). This is a way of customizing the equity option exposure.

Call provisions are another feature: some bonds/loans can be called (redeemed early) by the issuer after a certain period or if conditions are met. Ligand's convert was non-callable for 3 years to give investors protection. DRI's pref cannot be redeemed until 2029 except a change of control, after which DRI can call it (which they likely will if the rate steps up to 10% by then).

Step-up coupons like DRI's pref (7.5% rising to 10%+ after 5 years) are effectively an embedded option: the issuer has an "option" to leave it outstanding, but pays an increasing "premium" (interest) to do so – motivating a likely redemption.

Warrants are common equity kickers in royalty loans (XOMA issued 120k warrants to Blue Owl at premium strikes; Karyopharm gave HCRx some warrants as part of its 2024 refinancing as well). These warrants give lenders a potential equity participation if the company's value increases, aligning them with the company's success beyond just credit. For the issuer, warrants are dilutive only if the stock performs well – a trade-off often acceptable to secure better debt terms.

Revenue participation rights (synthetic royalties) themselves are like embedded options – the lender's return varies with sales performance. In Karyopharm's case, HCRx moved from a tiered ~12.5% royalty to a flat 7% royalty as part of the refinancing; effectively HCRx is betting the drug will do well enough that 7% over a longer period yields a good return, and Karyopharm reduced an onerous high-rate obligation.

Overall, these embedded features are negotiation levers: companies might offer warrants or conversion features to get a lower interest rate or longer term, while investors use step-ups and covenants to ensure they are compensated for risk over time. Each deal is a bespoke mix of these levers to reach a risk-reward balance.

Credit Ratings and Structuring for Rating Agencies

Only the largest fund, Royalty Pharma, currently has formal credit ratings (Moody's, S&P, Fitch each around the lowest investment-grade level). Achieving an IG rating was a strategic milestone for Royalty Pharma – it required demonstrating diversification, predictable cash flows, and moderate leverage (~2.5× debt/EBITDA after the IPO refinancing).

Once rated, RPRX can access a wider debt investor universe. Other public royalty funds like DRI or XOMA are unrated, which generally limits them to private or bank debt markets. However, if one of them sought a rating, they might consider structuring a partial securitization. For instance, DRI could potentially issue an ABS secured by some of its royalties – a senior tranche of that ABS might get an A or BBB rating if it's over-collateralized by high-quality royalties.

Rating agencies look at asset diversification, legal isolation (SPV structure), and coverage ratios in such cases. Even without issuing, funds often consider rating metrics: e.g. DRI's pref is treated partly as equity by agencies, improving its debt ratios.

Credit ratings also come into play for the pharma companies selling royalties – if a big pharma (rated A or BBB) sells a royalty stream, rating agencies sometimes analyze the impact (usually minimal unless it was a large portion of revenue).

In the future, we may see explicitly rated royalty bonds: for example, if an issuer securitized a portfolio of approved drug royalties with priority payment to noteholders, rating agencies could assign a rating based on expected loss modeling (similar to how music royalty securitizations have been rated).

For now, the key point is that investment-grade credit status is a huge advantage in lowering financing costs. Royalty Pharma has it; HCRx under KKR might eventually seek a rating if it creates a permanent capital vehicle; others remain sub-IG but manage their financings to appear prudent to lenders (keeping leverage moderate, etc.).

Fitch's rating of Royalty Pharma's latest notes at 'BBB-' specifically cited the predictability of royalty cash flows from a diversified portfolio and strong interest coverage (6–7×) as justifications. If any fund were to over-lever or concentrate risk, it would face junk-level costs quickly.

In sum, the mechanics of refinancing deals are about aligning the financing terms with the royalty asset's characteristics: long-lived assets attract long-term capital; volatile cash flows may require flexible payment terms; lower risk allows for senior tranches; higher risk is shifted to equity-like positions. By mixing and matching these structural elements, royalty funds have been able to continually refresh their war chests and remain aggressive in the deal market.