DaVita Prices $1.75B Senior Notes; Rated by Moody's
DaVita HealthCare Partners Inc. (DVA) has recently issued senior notes worth $1.75 billion that are scheduled to mature in 2024. These 10-year notes carry an interest rate of 5.125%.
The proceeds from the issuance will be used to partly repay DaVita’s term loan borrowings under its senior secured credit facilities. The company also intends to use the proceeds to meet expenses and fees related to the debt issuance.
The aforementioned debt issuance will require DaVita to pay an annual interest of $89.7 million. Nevertheless, the company’s solid operational performance generates enough funds to service the debt uninterruptedly.
However, debt expense of DaVita has risen over the past few years. The above-mentioned issuance implies a further increase in debt expense, which will pressure margin expansion.
DavIta has also entered into new senior secured credit facilities of $5.5 billion last week. The proceeds from this transaction will be used to repay the 6.375% senior notes worth $775 million that are scheduled to expire in 2018. This, along with the aforementioned debt issuance, form part of the company’s attempt to refinance existing debts and thereby generate cost savings.
Concurrently, Moody’s Investors Service, the credit rating wing of Moody’s Corporation (MCO) has provided a debt rating of “B1” to these notes and affirmed the Corporate Family Rating of “Ba3” and Probability of Default rating of “Ba3-PD”. All these ratings carry a stable outlook.
The Ba3 rating was based on Davita’s high financial leverage, regulatory risks and challenges faced by the company in delivering an efficient risk-based integrated care business. Moreover, the reimbursement pressure from the government over the past year that led to rate cuts was considered while the ratings assignment. The stable outlook was driven by Moody’s projection of a steady increase in DaVita’s revenues. Additionally, the rating agency stated that if debt-to-EBITDA is maintained below 3.5x or if operating cash flow and free cash flow to adjusted debt ratios are maintained in the mid-teens, the ratings could be revised upward, though in the long run. On the other hand, if the company’s debt levels increase, that is, if the leverage is sustained above 4.5x or if the cash flow to debt is kept below 3%, the ratings could be lowered.
Currently, DaVita carries a Zacks Rank #3 (Hold). However, better-ranked players in the industry that look attractive at current levels include Almost Family Inc. (AFAM) and HEALTHSOUTH Corp. (HLS). While Almost Family sports a Zacks Rank #1 (Strong Buy), HEALTHSOUTH has a Zacks Rank #2 (Buy).
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