HCA, Others Replace Senior Debt With Junk

HCA Inc. has been making strides in the high-yield market as the LBO-backed hospital operator pares down its mountain of term loan debt in exchange for junk bonds with longer-term maturities.

In the latest of several such moves by HCA during the past year, the Nashville, Tenn.-based company issued $1.4 billion of senior secured first-lien notes due September 2020, which will be used to repay term loan debt that comes due in a couple of years. The size of the bond offering was increased from an originally planned $1.0 billion.

HCA was the target of the second-largest LBO in history when it was acquired for about $33 billion by Bain Capital, Kohlberg Kravis Roberts & Co. and Merrill Lynch Global Private Equity in 2006. The deal included about $16.8 billion of total term loan and revolver debt, much of which matures in 2012 and 2013, according to Thomson Reuters LPC.

Since the high-yield market came back in the middle of 2009, buyout firms have eagerly taken advantage of investor appetite to recapitalize their balance sheets. Though HCA is the largest and most active (and perhaps even the earliest) of the bunch, several other sponsor-backed companies—including Freescale Semiconductor and Learning Care Group Inc.—have also recently drawn from the junk well to pay down bank debt.

For HCA, this month’s junk bond issuance was the company’s fourth in little more than a year. According to IFR, a sister publication of Buyouts, HCA in 2009 issued about $310 million of second lien notes in February; $1.5 billion of senior secured notes in April; and $1.25 billion of senior secured notes in July, all of which was used to pay down existing bank debt.

News of HCA’s latest high-yield issuance came just weeks after the company announced it would pay a $1.75 billion dividend to its sponsor owners that was funded through the company’s asset-based and general revolving credit facilities, as well as by cash on hand.

No doubt the company’s ability to raise debt and pay 10-figure dividends is related to its strong performance. HCA’s 2009 revenue rose 6 percent to $30.1 billion, while net income last year came in at nearly $1.1 billion, up 57 percent.

Freescale Semiconductor Inc. was another sponsor-backed business to issue high-yield debt to pay down its term loans. In February, the semiconductor maker issued $750 million in senior secured first-lien notes due March 15, 2018, proceeds of which were used retire a portion of its senior credit facilities. Freescale was acquired for $17.6 billion in 2006 by The Blackstone Group, The Carlyle Group, Permira and TPG.

And earlier this month, Learning Care Group Inc, a provider of child care and preschool educational services, raised $265 million from the high-yield market, which it used to refinance term loan and mezzanine debt. Morgan Stanley Private Equity acquired a majority stake in the company in 2008 for about $650 million