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THC Prices Previously Announced Notes

Zacks Equity Research

Healthcare services provider Tenet Healthcare Corporation (THC) priced its previously announced private offering of senior notes. The aggregate offering of $4.6 billion comprises of $1.8 billion aggregate principal amount of senior secured notes, due 2020 and $2.8 billion aggregate principal amount of senior unsecured notes due 2022.

The $1.8 billion senior secured notes carry an annual interest rate of 6% while the $2.8 billion senior unsecured notes carry an annual interest rate of 8.125%. Tenet Healthcare intends to use the proceeds from the issuance to partly finance the company’s acquisition of Vanguard Health Systems Inc. (VHS) that is expected to culminate by the end of this year. Also some of Vanguard’s existing debts will be refinanced by the same.

With a total debt of $5.6 billion at the end of the second quarter of 2013, Tenet Healthcare’s debt level increased 19% year over year. As of Jun 30, 2013, the debt-to-capital ratio deteriorated 6 basis points (bps) year over year and 4 bps from 2012 year end. The current issuance of $4.6 billion is expected to further deteriorate the debt-to-capital ratio going forward.

The new issuance would require Tenet Healthcare to pay an annual interest of $109 million on the senior secured notes and $228.9 million on the senior unsecured notes. Nevertheless, the company’s strong operational performance generates enough funds to service the debt uninterruptedly. Its interest expense, that lowered 3.9% year over year in the second quarter, is expected to rise with these new issuances.

Last week Moody’s Investor Service, the credit rating agency of Moody’s Corporation (MCO) allotted debt ratings to this $4.6 billion note issuance. Moody’s rated the $1.8 billion notes to “Ba3” while the $2.8 billion notes were provided with a “B3” rating.

Tenet Healthcare currently carries a Zacks Rank #3 (Hold). Among other healthcare companies, Acadia Healthcare Company Inc. (ACHC) with a favorable Zacks Rank #2 (Buy) is worth considering.

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