Despite its chequered past and ongoing legal battles, Tenet Healthcare has successfully tapped the high-yield market over the past year and paid off a significant amount of debt. With the next round of maturities not due until 2011, the company is focused on improving its performance as well as preserving cash for its impending settlements. By Joy Ferguson.
Tenet, which has been embroiled in a federal investigation into its billing practices for the last few years, in January managed to complete the second leg of a refinancing that paid off US$950m in maturing debt due 2006 and 2007.
January's offering, totalling US$800m, was upsized from US$500m and priced at the wide end of 9.25%–9.50% talk. The deal featured a 9.25% coupon and printed at 98.406 to yield 9.50%.
The drive-by transaction, led by Citigroup and Banc of America, featured an identical structure to the US$1bn 10-year bullet that the hospital company had priced in July 2004 at a yield of 9.875% through sole bookrunner Citigroup. That included an investment-grade covenant package despite the B3/B rating.
Tenet was motivated to succeed on the two deals for a couple of reasons, the maturities being the principal one. It also wanted to make good with investors, who had bought a 7.375% senior notes issue due 2013 at 97.868 in 2003, only to see the bonds fall to the mid-80s by January 2004.
Tenet also knew it could ill afford to tie up collateral or severely restrict its uses of cash while it battles legal problems on a number of fronts. Most significantly, the company expects to pay more than US$1bn in settlement charges to the US government concerning its physician compensation practices. Additional settlements from lawsuits related to unnecessary medical procedures will increase that amount of debt.
Already in December 2004, Tenet agreed to pay US$395m to settle lawsuits brought by a group of former patients claiming that doctors at its Redding Medical Centre in California performed unnecessary cardiac procedures. The Redding settlement left the company in breach of its bank facility. Tenet cancelled the US$800m loan in January and replaced it with a US$250m letter of credit facility.
Despite the company's precarious state, bond investors are relatively comfortable with the credit – which has mostly to do with the acute care provider's position in a solid industry, its strong asset coverage and management's candour.
"The bonds have performed well because of the sector overall. People also think there is strong asset coverage at Tenet," said a buyside analyst. "When Tenet was going through these [legal] issues, they were selling assets to raise cash, so people thought that was positive."
Indeed, in terms of liquidity, the company has roughly US$1.5bn in cash reserved to pay for future settlement charges.
Investors have also been impressed with management's transparency. "The management team has been very straightforward," said one analyst. "They've said in the past that they know this isn't going to be a short-term turnaround story. It's got a lot of steps to recover, but they do a good job of detailing those steps and it looks like they are hitting those challenges."
To be sure, Tenet has tackled some of its problems by downsizing its hospital portfolio, regaining respect from its physicians, and improving managed care pricing. "I think the momentum is positive. The improving results are getting better," summed up the analyst The company's bonds reflect that confidence. Last week, the 9.875% notes due 2014 were quoted at 107.50. The 7.375% notes of 2013 traded at 99.
Still, the company does have a long way to go, and not everyone agrees that the bonds are fairly valued. "I think the bonds are over-rallied," said the buyside analyst. "There is more risk than is being talked about. Other hospitals have much lower risk." He stressed that Tenet's bonds do not offer enough incremental yield and that a turnaround will not happen as fast the market perceives.
Tenet's competitors include HCA, Triad, Vanguard Health, and Iasis healthcare. HCA's 8.75% Double B notes due 2010 traded at 113 last week, while Triad's Single B 7% notes due 2013 traded at 102.
Standard & Poor's put Tenet on negative watch in April, citing the company's expected weak operating performance and cashflow over the next year and the uncertain impact of the company's numerous strategic initiatives to improves its long-term prospect. These factors offset the size of the company's hospital facility base, which S&P said would still be considerable after Tenet's pending asset sales.