Tenet's debt strategy

Tenet Healthcare Corp. is taking a different tack in its refinancing journey, and it will even save the company some money on interest costs.

Dallas-based Tenet said it sold $345 million in convertible preferred stock last week. The preferred shares will pay a quarterly dividend equal to a 7% annual return, according to a securities filing. The proceeds of the stock issue were used to retire debt that carries a 9.25% interest rate, Tenet said, so the spread between those two percentages represents the cash gain to Tenet from the new stock issue, said Jeff Villwock, a managing director of Atlanta-based Genesis Capital. “It improves the balance sheet and arguably can lower their future cost of debt capital,” he said.

Besides lower leverage, the interest savings should add three cents per share to Tenet’s 2010 earnings, according to a report by Kemp Dolliver, a managing director and healthcare stock analyst with Avondale Partners.

The sale included $300 million in shares to investors and $45 million in shares purchased by the investment banks underwriting the preferred stock issue, Tenet said. The company expects net proceeds of $335 million after expenses. Tenet said it used $315 million of the proceeds to repurchase $300 million of the company’s 9.25% senior notes due in 2015. Tenet had $800 million of the notes outstanding before the transactions, according to Dolliver.

By repurchasing those notes, Tenet will save nearly $27.8 million in interest costs annually. The dividend costs on $345 million are $24.2 million, for an annual savings of $3.6 million. The $1,000 face value preferred shares, moreover, will convert to between roughly 142 and 171 shares of Tenet’s common stock on Oct. 1, 2012; the precise number depends on the price of Tenet’s common shares on the mandatory conversion date. Once the preferred shares are converted, Villwock added, Tenet will reap all of the interest savings from the bonds that were repurchased with the proceeds.

Tenet’s previous financing moves this year—a $1.6 billion bond exchange offer in January and $450 million in new 10-year bonds sold in June—lengthened the company’s debt maturities, but did nothing to lower its overall debt (June 15, p. 12). “The biggest impediment that they have is the amount of leverage,” Villwock said. Tenet’s operating earnings are at least meeting its financing needs now, Villwock said, but cutting debt requires operating earnings to exceed those needs.

The company announced earlier this month that its expectations for 2009 earnings before interest, taxes, depreciation and amortization were rising to a range of $900 million to $950 million, up from $810 million to $875 million. In another report, Avondale’s Dolliver wrote that he expects the company to exceed $1 billion in 2010 on this measure of operating earnings, thanks to improvements in volume, good expense control and better-than-expected trends on bad debt and payer mix.

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