HealthSouth sees $360-$445 million 2016 free cash flow, eyes further 2022 note redemptions

By Paul Deckelman

New York, Jan. 12 – HealthSouth Corp. anticipates generating adjusted free cash flow of between $360 million and $445 million this year.

And the Birmingham, Ala.-based operator of 121 inpatient rehabilitation hospitals and provider of home-based post-hospital services in the United States and Puerto Rico may devote some of that expected windfall to paying down a portion of its estimated $3.2 billion of long-term debt.

The company’s president and chief executive officer, Jay F. Grinney, told participants at the 34th Annual J.P. Morgan Healthcare Conference on Tuesday in San Francisco that the company is “going to continue to deploy the excess free cash flow for the benefit of our shareholders.”

He noted that the company – which last year repurchased some $47 million of its New York Stock Exchange-traded common shares – still had around $160 million of stock-repurchase authority remaining at Dec. 31.

Note redemptions possible

Besides possible stock buyback this year, Grinney said that “we have the ability to go after some of the ’22 notes.”

HealthSouth sold $250 million of 7¾% senior notes due 2022 in September of 2010 and another $60 million of the notes in an add-on transaction, bringing the total original outstanding amount of the notes to $310 million.

After several small subsequent redemptions – under a provision in the notes’ indenture allowing HealthSouth to redeem up to 10% of the outstanding amount in any given 12-month period at a price of 103 plus accrued interest – the company had $227 million of the notes still on its books at the end of the 2015 third quarter on Sept. 30. That month, all of the notes became callable at a price of 103.875 plus accrued interest – and HealthSouth redeemed $50 million at that price on Nov. 30, using cash on hand and borrowings under its senior secured revolving credit facility.

That left some $177 million of the notes still outstanding as of the end of 2015 and eligible for redemption any time at the company’s option.

HealthSouth’s redemption last April of all of its $290 million of 8 1/8% senior notes due 2020 that it had sold back in 2009, using the net proceeds from its $300 million sale of 5 1/8% senior notes due 2023 in March, leaves the 7¾% notes as both its highest-coupon piece of paper still outstanding and its closest maturity.

Acquisitions boost debt level

Pro-forma for the redemption of the $50 million of 7¾% notes as well as credit facility borrowings and related debt transactions associated with two sizable acquisitions that it made in 2015 – its purchase of home health care services provider CareSouth and the separate acquisition of Reliant Hospital Partners – long-term debt stood at $3.20 billion, up from $2.13 billion at the end of 2014.

Besides the remaining 7¾% notes, its capital structure included the $300 million of new 5 1/8% notes due 2023, which had priced at par in a quick-to-market transaction on March 9, 2015.

The company also had outstanding $1.215 billion of 5¾% senior notes due 2024, $350 million of 5¾% notes due 2025, $264.7 million of 2% convertible senior subordinated notes due 2043.

The company had $120 million of borrowings outstanding under its $600 million revolver due 2020 and $445 million of term loan facility debt, also due in 2020. The term loan and revolver borrowings were at an interest rate of 200 basis points over Libor.

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