Shares of HCA Holdings, Inc. (HCA) moved down 1.2% to $51.06 on Mar 4, 2014 after the company declared that its subsidiary, HCA Inc. would issue a $3 billion aggregate principal amount of senior secured notes. The terms of the notes were not disclosed and will be subject to market conditions at the time of pricing.
The proceeds from the offering will be utilized in parts. HCA Holdings will use a portion of the proceeds to redeem and repurchase the outstanding amount under the $1.5 billion senior secured notes (carrying an interest rate of 8.5%), slated to mature in 2019.
The remaining proceeds will be utilized to redeem and repurchase the outstanding amount under the $1.25 billion senior secured notes (with 7.0875% rate of interest) that are scheduled to mature in 2020 and to pay related fees and expenses, and for general corporate purposes.
Last month, HCA Holdings reported fourth-quarter and full-year 2013 results with high interest expenses for the year. Now with the above issuance, interest expenses are expected to increase further. Nevertheless, the company’s solid operational performance generates enough funds to service the debt uninterruptedly.
However, HCA Holdings is already burdened with debt. At the end of 2013, long-term debt of the company increased 0.3% from that in 2012. The $3 billion issuance is expected to increase HCA Holdings’ debt further, affecting the balance sheet strength.
Companies frequently resort to debt issuance to raise funds. For instance, within the healthcare services sector, Tenet Healthcare Corp. (THC) issued 6% senior notes worth $4.6 billion in Sep 2013 to fund the company’s acquisition of Vanguard Health Systems Inc. In Mar 2013, healthcare service provider, Acadia Healthcare Company, Inc. (ACHC) raised funds through a $150 million note issuance (carrying an interest rate of 6.125% and due 2021) to fund acquisitions and to pay for general corporate purposes.
HCA Holdings currently carries a Zacks Rank #3 (Hold). However, Chemed Corp. (CHE) is a better-ranked stock in the sector with a Zacks Rank #1 (Strong Buy).
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