Molina Healthcare Inc. (MOH) recently decided to issue 1.125% cash convertible senior secured notes worth $450 million with maturity scheduled on Jan 15, 2020.
In order to manage over allotments, management will also provide an option to the initial purchasers of the notes to buy an additional $100 million aggregate principal amount of the notes. Additionally the company also intends to enter into a privately negotiated cash convertible note hedge transaction with the initial buyers of the notes.
The new issuance will require the company to pay interests half yearly on January 15 and July 15.
The proceeds from the issuance is expected to be $436 million and will be deployed to finance the cash convertible note hedge transaction, buy back up to $50 million of its common stock and to repay the outstanding debt of $40 million. The remaining proceeds will be utilized for working capital needs and general corporate purposes as well as for repurchasing 3.75% Convertible Senior Notes scheduled to mature in 2014.
The initial conversion rate for the notes will be 24.5277 shares per $1,000 principal amount.
As of Dec 31, 2012, the debt-to-capital ratio for the company was 0.25x which represented an increase of 3 percentage points from 0.22x at 2011 end. With the issuance of the $450 million debt, the debt-to-capital ratio is expected to increase significantly by 23 percentage points to 0.48x.
Molina’s interest expense in 2012 increased 8.1% year over year. The new issuance would require the company to pay an annual interest of approximately $5.1 million which will further add to its interest expenses. Nevertheless, the company’s solid operational performance generates enough funds to service the debt uninterruptedly.
Last December, another healthcare service provider Humana Inc. (HUM) announced that its public offering of 3.15% senior notes worth $600 million, maturing in December 2022, and 4.625% senior notes worth $400 million, due December 2042, had been completed. The 3.15% senior notes had been issued at a 0.39% discount, while the 4.625% senior notes had been issued at a 0.063% discount. The proceeds from the notes were used to fund the acquisition of Metropolitan Health Networks Inc. (:MDF) and to repay Metropolitan’s outstanding debt.
Molina carries a Zacks Rank #2 (Buy). Another healthcare service company Coventry Healthcare (CVH) shares the same Zacks Rank and is worth noting.
More From Zacks.com