In February, Tenet Healthcare Corp. was able to push back the due dates on about $1.4 billion in bonds, and the company paid for the privilege in higher interest rates on the new bonds. This month, the Dallas-based hospital operator managed to extend its debt maturities even further and gained lower interest rates in the process.
Borrowing bounces back
Bond issues on pace to topple '08 figures
Tenet and cancer-care provider US Oncology, which also had an oversubscribed bond issue this month, have taken advantage of an improvement in the high-yield bond market for issuers triggered in part by Nashville-based HCA, said Bob Veno, a credit analyst covering healthcare and retail issuers for KDP Investment Advisors, Montpelier, Vt. HCA initially proposed a $500 million bond issue in April to pay down some coming maturities, but the investor appetite for the bonds was so high that the company eventually sold $1.5 billion in bonds (April 20, p. 12).
The weaker companies are still challenged or closed out of the market, but it was a good sign that companies that had a good story to sell could come to market, Veno said of HCAs April issue. Before that, any company that was facing near-term maturities was facing some significant hurdles.
After three quarters that were nearly completely barren of high-yield corporate bond issues, the second quarter saw a resurgence of issues, Standard & Poors said last week. High-yield issues have totaled $32.7 billion already in 2009 compared with $39.5 billion for all of 2008, S&P said. (Credit markets for not-for-profit issuers are loosening, too. See story on p. 24.)
The healthcare sector is second overall for second-quarter issuance, having sold $3.84 billion in new debt compared with $4.75 billion for the media and entertainment sector, S&P reported.
This opportunity might be particularly important for healthcare companies, Veno said. Healthcare bonds tumbled in price in February as talk of healthcare reform heated up, driving up the interest that issuers could expect to pay on any new issues, Veno said. Given the effect that reform talk had then, healthcare companies must be aware that interest rates for healthcare issuers could rise again if the reform proposals are perceived to be problematic for service operators, Veno said.
For Tenet, both of its bond issues this year were actions the company could afford not to do if the conditions werent right, Chief Financial Officer Biggs Porter said. The more recent issue, originally slated for $450 million but expanded to $925 million because of high investor interest, was an even greater opportunity for the company, as it both extended its debt repayment schedule and lowered its interest rate on the debt, Porter said.
The proceeds from the issue will go to pay off bonds due in 2014. Tenet said last week that investors had redeemed $891.4 million of the 2014 notes as of June 11 in response to Tenets tender offer, which ends June 25. All things being equal, you expect to have increased costs when you extend maturities, but because of the strength of the market and the demand for bonds, we were able to do it for less, Porter said. Moreover, he added, the company also lowered its risk of future inflation driving up its borrowing costs. Tenets next significant maturity comes in 2013, when $1 billion in bonds will be due for repayment, according to a securities filing.
US Oncology, The Woodlands, Texas, had similar reasons for pursuing its issue, which rose to $775 million from $465 million, said Michael Sicuro, the companys executive vice president and chief financial officer. The new bond issue will pay off a term bank loan that was coming due in installments in 2010 and 2011, and some senior notes maturing in 2012, Sicuro said. The new issue refinances about half of the companys indebtedness, which was $1.53 billion as of March 31 according to a securities filing, through 2017, Sicuro said. We didnt need to do it now, but all the moons lined up for us, Sicuro said.
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