There was an article in today´s Wall Street Journal that mentioned Tenet bought back some of its paper with cash at an $88 price (vs. $100 is full par). We see some hospitals currently looking at much more attractive discounts on their own tax-exempt bonds. Repurchasing underpriced bonds can generate a substantial return for these hospitals, but can be tricky if not properly planned for.
Some buybacks are done through publicly announced tender offers, but many are done in the open market without formal notification, often without driving prices higher. Tenet bought back $68 million in debt from the open market for $60 million in cash in July. The #1 challenge is how to pay for the repurchase.
For tax-exempt hospitals, cash on hand is key and in today´s difficult borrowing environment, issuing new debt to take out all debt is expensive.
Most bond repurchases that have taken place to date were funded from cash on hand by larger systems for whom liquidity is not an issue. If liquidity is an issue, then the repurchase can be funded with new bonds. That´s where it gets tricky, as there are rules associated with tax-exempt refundings, and hospitals are generally averse to selling new bonds until they know how much old bonds they will end up with. A bridge line can help, but exposes the hospital to refinancing risk if the bond markets change.
Repurchasing underpriced bonds is an economically attractive concept, but must be carefully planned to avoid surprises.
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