HCI Group Inc. (HCI) declared that it would issue a 6 year $100 million aggregate principal amount of convertible senior unsecured notes. The initial buyers of these notes, that are scheduled to mature in 2019, will also be provided with an option to purchase up to an additional amount of $15 million.
Only in cases of specific events, these notes will be convertible, till Jan 1, 2019. After that, the notes will be liable for conversion at any time till maturity. These notes might be converted to cash, shares of HCI Group or a combination of both.
HCI Group will be required to pay interest half-yearly. Its interest expense from the Jan 2013 senior notes stood at $2.4 million in the first nine months of 2013. The latest issuance will increase interest expense going forward. Nevertheless, the company’s solid operational performance generates enough funds to service the debt uninterruptedly.
The proceeds from the issuance will be utilized in parts. Up to $30 million will be used for share repurchases and the remaining $70 million will be used for working capital requirements and other general corporate purposes.
As of Sep 30, 2013, the debt-to-capital ratio for the company was 0.19x, up 2 percentage points sequentially. However, with the issuance of the $100 million debt, the debt-to-capital ratio is expected to deteriorate going forward.
Quite a few companies have been raising funds through the issuance of debt in the last few weeks. Last month, ProAssurance Corporation (PRA) had offered 5.30% senior secured notes worth $250 million with maturity scheduled on Nov 15, 2023. Recently, Genworth Holdings Inc., a subsidiary of Genworth Financial, Inc. (GNW) also offered a 4.800% senior notes worth $400 million, scheduled to mature in 2024.
HCI Group currently carries a Zacks Rank #1 (Strong Buy). Another stock worth considering within the property and casualty insurance sector is RLI Corp. (RLI) which carries the same Zacks Rank as HCI Group.
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