Tenet Healthcare Issues Debt, Rated by Moody's


Tenet Healthcare Corporation (THC) 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 101.50%.

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 issuance.

Concurrently, Moody’s Investors Service, the credit rating wing of Moody’s Corporation (MCO) 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.

Our Take

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.

Zacks Rank

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. (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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