Tenet Healthcare Corporation
) has recently issued $500 million aggregate principal amount of
senior notes that are scheduled to mature in 2019. These notes
carry an interest rate of 5.00% and are an add-on to the company's
$600 million unsecured senior note issuance that was completed in
Mar 2014. These 5-year notes will be issued at a premium of
Tenet Healthcare intends to use the proceeds from the debt issuance
to repay the 9.25% senior notes of the company worth $474 million
that are scheduled to expire in 2015. The remaining proceeds will
be used to meet fees and expenses related to the latest debt
Concurrently, Moody's Investors Service, the credit rating wing of
) affirmed the existing "B3" debt rating, Corporate Family Rating
of "B1" and Probability of Default Rating of "B1-PD." All these
ratings carry a stable outlook.
The rating affirmation came on the back of the credit rating
agency's expectations that the above issuance will lead to a slight
increase in Tenet Healthcare's financial leverage. However,
interest costs are expected to decrease. Moody's also expects Tenet
Healthcare to utilize the debt issuance for constructive purposes
like acquisitions and capital deployment. Nevertheless, free cash
flow is expected to be modest in the short run due to increased
capital spending. As a result, Moody's believes that Tenet
Healthcare might find it difficult to repay debt meaningfully.
The latest debt issuance of Tenet Healthcare will require it to pay
interests worth $25 million annually. Thanks to the company's solid
operational performance, it generates enough funds to service the
debt uninterruptedly. Additionally, the fact that the debt will be
issued at a premium of 101.50% reflects the company's strong
fundamentals, impressive credit scores and goodwill of investors.
However, Tenet's interest expense has been rising over the last two
years. In 2012, it increased 9.9% from the previous year and in
2013, it rose 15% year over year. The first quarter of 2014 also
witnessed a 76.7% increase in interest expense. The above issuance
calls for a further increase in interest expenses, thereby
pressuring margin expansion.
Tenet Healthcare is a highly leveraged company. Its debt-to-capital
ratio has been deteriorating over the past two years. This metric
deteriorated 7 percentage points to 0.82x in 2012, another 11
percentage points to 0.93x in 2013 and a further 1 percentage point
to 0.94x at the end of first-quarter 2014. The above issuance is
expected to impact this ratio further and thus hamper the company's
balance sheet strength.
Tenet Healthcare currently carries a Zacks Rank #3 (Hold). However,
better-ranked healthcare service providers that look attractive at
current levels include
Almost Family Inc.
). While Almost Family sports a Zacks Rank #1 (Strong Buy),
HEALTHSOUTH has a Zacks Rank #2 (Buy).
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