Tenet Healthcare Corporation (THC - Free Report) has recently announced that it is issuing 5-year senior unsecured notes worth $600 million. The notes carry an interest rate of 5% per annum and are scheduled to mature in 2019. The notes will be subordinated to all of Tenet’s present and future senior secured obligations.
Tenet intends to use the proceeds from the transaction to repay its debts under the company’s senior secured revolving credit facility and transaction fees and expenses related to it. The funds will also be utilized to pay for other general and corporate purposes.
The aforementioned debt issuance will require Tenet to pay an annual interest of $30 million. Nevertheless, the company’s solid operational performance generates enough funds to service the debt uninterruptedly.
However, interest expenses of Tenet have been on a surge over the last two years. In 2012 it increased 9.9% from that in 2011 and in 2013, expenses scaled up 15% year over year. The above issuance calls for a further increase in interest expenses, thereby pressuring margin expansion.
Peeping into the balance sheet of the company shows that Encore’s debt-to-capital ratio has also been deteriorating over the past two years. This metric deteriorated 7 percentage points to 0.82x in 2012 and another 11 percentage points to 0.93x in 2013. The above issuance is expected to impact this ratio further, making the balance sheet highly leveraged.
This healthcare stock has been issuing debts to fund its outstanding debt repayments as well as inorganic growth initiatives for quite some time. Tenet has resorted to several debt issuances in 2013. The company issued 4.5% notes worth $850 million in Jan 2013 and completed it in February. Again in May 2013, Tenet announced 4.375% notes worth $1.05 billion which was completed later that month. In Sep 2013, the company issued two notes offerings – $1.8 billion senior secured notes with 6% interest rate and a $2.8 billion note offering carrying an interest rate of 8.125% per annum. As a result, the long-term debt burden of the company increased to a substantial 66% in 2013.
Tenet currently carries a Zacks Rank #5 (Sell). Some better-ranked stocks in the healthcare services space include Chemed Corp. (CHE - Free Report) , Brookdale Senior Living Inc. (BKD - Free Report) and Almost Family Inc. (AFAM - Free Report) . All three stocks carry a Zacks Rank #1 (Strong Buy).