Debt dealings

For-profit hospital operators were able to take advantage of a receptive market for corporate borrowing in recent weeks, refinancing almost $5.5 billion in debt.

The companies that restructured their debt—Health Management Associates, Community Health Systems, Franklin, Tenn., and Tenet Healthcare, Dallas—were seeking to lower the interest paid on their debt, extend maturities and better position themselves for potential acquisitions.

Health Management Associates, Naples, Fla., restructured $3.5 billion worth of debt, Community Health Systems refinanced $1 billion and Tenet Healthcare issued $900 million of debt.

The moves follow refinancing transactions by for-profit leader HCA in late summer and early fall, which added $1.2 billion in debt or debt capacity through the issuance of $5.5 billion worth of notes and the reworking of what is now a revolving credit facility of $2.5 billion.

Issuers were being opportunistic in taking advantage of relatively healthy demand from lenders and debt purchasers before the end of the year, said Jon Krieger, managing director in healthcare investment banking for Berkery Noyes, New York.

Corporate borrowers have learned to borrow when they can after extended periods of illiquidity, he said. “The debt markets had essentially been closed for a long time,” Krieger said, and with the economy improving, the ability to borrow has improved as well.

Indeed, executives at HMA had been talking about restructuring its debt for the past four to six months, waiting for a situation that was attractive to their financing needs, said Robert Farnham, senior vice president of finance, speaking this month at a Bank of America Merrill Lynch investor conference on the Web. (HMA executives didn't return calls to discuss the company's borrowing.)

With 75% of its borrowing structure made up of a single-term loan, the company was seeking to balance out its capital structure in a way that would ramp up its capacity to make purchases and participate in joint ventures, and found the market to be receptive, Farnham said. “The execution went very well,” he said.

As a result, HMA paid off $410 million in debt taken on as part of its purchase of seven-hospital Mercy Health Partners in Tennessee, which has been renamed Tennova Healthcare. HMA in November also announced it had been chosen to negotiate exclusively with Integris Health, Oklahoma City, on jointly managing five Oklahoma hospitals, a transaction that may require cash on HMA's part.

In addition, HMA paid off a $2.5 billion term loan that matured in 2014, which Farnham said was a refinancing risk looming in the near future for the company. About $187 million of the new debt went toward terminating a swap contract related to its existing term loan, according to an HMA fact sheet. HMA replaced most of that debt with two new term loans, a $725 million loan that matures in five years and a $1.4 billion loan that matures in seven years, he said.

Another change HMA executives were eager to make was to refinance a $500 million revolving line of credit that matured in March 2013, which, because of its relatively close maturity, would after the first quarter of next year be considered a current liability for accounting purposes, he said. The new line of credit matures in five years. HMA also issued an $875 million note with a coupon of 7.375% that matures in January 2020, he said.

The resulting capital structure will make it easier for HMA to do deals in a healthcare environment that will create opportunities to purchase and enter into joint ventures with not-for-profit hospitals, he said. “This really is a capital structure that fits more in line with the company,” Farnham said. “We perceive ourselves more as a growth company today than we did three or four years ago.”

Executives for Tenet also saw a market opportunity in a refinancing, and significantly lowered its debt costs as a result. “The high-yield market provided a very favorable window” for corporate borrowers, Tenet spokesman Rick Black said. Tenet borrowed $900 million due in 2018 at an interest rate of 6.25%, allowing it to last week announce it had purchased $713 million of its debt carrying a rate of 9% and set to mature in 2015, according to a news release. That move should save Tenet almost $20 million a year in interest.

Community Health System's savings are not as dramatic. It purchased $1 billion of notes carrying an interest rate of 8.875% and set to mature in 2015 with proceeds from a new note offering that carries an interest rate of 8% and matures in 2019. CHS should save about $9 million a year on the switch and extended the maturity by about four years. Community Health did not return phone calls seeking comment on its debt deals.

Meanwhile, HCA, Nashville, had gotten a head start earlier this year with a flurry of deals. The company on Aug. 1 issued $3 billion of 6.5% notes due 2020 and $2 billion of 7.50% notes due 2022, according to a company spokesman. Net proceeds were used to redeem all of its $1.578 billion 9.625%/10.375% toggle notes due 2016, and all of its outstanding $3.2 billion 9.25% notes due 2016, according to HCA.

On Sept. 30, HCA refinanced its revolving credit facility, increasing the size to $2.5 billion from $2 billion, and extending the maturity to September 2016 from November 2012.

The company issued another $500 million in notes Oct. 1, these carrying an interest rate of 8% and a maturity of 2018. HCA planned to use the proceeds for general corporate purposes including for part of the cost of purchasing the 40% interest in HealthONE it didn't already own for $1.45 billion (Oct. 17).