In recent weeks, convertible securities offerings have come back into vogue as a way for companies and investors to make the most of a volatile equities market. Publicly traded hospital companies have been among those testing the demand for this hybrid financing vehicle.
Rural hospital chain Province Healthcare Co., Brentwood, Tenn., sold $150 million of seven-year notes at the beginning of this month, which are convertible into Province shares at $41.55 per share, a premium of 27% over the share price at the time of the sale.
Convertible securities are a crossbreed of stock and bond that offer fixed income and can be converted into company stock at a set price. They typically offer the investor a lower interest rate than a nonconvertible bond, but they also are less volatile than stocks, although their value rises and falls with the value of the issuing company's stock.
Primarily used by institutional investors that hold the bonds and collect the income, convertibles typically include the right to convert the principal into a fixed number of shares of the company's stock, according to a ratio set when the bond is issued. It would not make sense to trade the bonds for stock unless the stock price rises at least to a price that when multiplied by the number of shares in the conversion ratio would equal or exceed the principal amount.
Convertibles offer a way to raise money at a lower interest rate than a company would have to pay on nonconvertible bonds, yet they offer more stability to investors than a stock offering.
"The volatility in the market meant that the convertible market is a more attractive opportunity at this time," says Merilyn Herbert, a spokeswoman for Province.
Eighteen-hospital Province was one of the first companies to sell convertible bonds since the lull in equity offerings intensified after the Sept. 11 terrorist attacks. Last November, Province sold $150 million of five-year convertible subordinated notes, which it offered at a time when its stock was relatively expensive.
Marky Hall, a convertible bond senior analyst at CRT Capital Group in Greenwich, Conn., an institutional brokerage firm specializing in convertible and high-yield securities, says these offerings remain an attractive source of financing for growing companies with good fundamental earnings trends, parameters that define for-profit hospital companies.
"It broadens your investor universe," she says. "It allows you to sell equity at a very good premium, to take advantage of what's probably a strong stock price; and there's much more of an appetite for this type of convertible paper than there is for just plain high-yield paper right now."
Community Health Systems, Brentwood, Tenn., unlike Province, is new to the convertible scene. The 55-hospital chain announced the Friday before the Sept. 11 attacks a dual offering, a secondary public offering and a convertible securities offering. On Oct. 4, it filed an amended registration announcing it planned to sell 12 million shares of stock and $250 million of the convertible subordinated notes. Community announced the pricing of its offering last week: $26.80 per share, the closing price on Oct. 9. The subordinated notes have a conversion price of about $33.50 per share, which is a premium of about 25%.
Some analysts say they expect other healthcare services companies, which are traditionally considered a defensive sector in troubled economic times, to tap the convertibles market as well.
Darren Lehrich, a healthcare facilities analyst for SunTrust Robinson Humphrey, says companies may turn to convertible securities offerings because-often bought by large institutional buyers in the private market-they have less regulatory red tape than a straight equity offering. Also, their value does not hinge on the daily ups and downs of the market as much as a stock offering.