DaVita Refinances Debt – Analyst Blog

Moving ahead with its debt restructuring activity, on Friday DaVita Inc. (DVA) announced its plan to sell about $1.45 billion of its senior notes and utilize the net proceeds to redeem another set of outstanding senior security notes, whose principal amount is worth $1.55 billion. The Board of DaVita had authorized a $3.35 billion debt refinancing activity in September 2010.

 

The $1.55 billion notes includes 6.625% senior notes worth $700 million to be matured in 2013 and another set of 7.25% senior notes worth $850 million slated to mature in 2015. Recently, DaVita also affirmed that it has taken up credit line borrowings in order to refinance debt worth $1.8 billion under its existing senior secured credit facilities.

 

However,  the terms of the $1.45 billion notes offering are yet to be disclosed. These notes are being offered pursuant to an effective registration statement filed with the Securities and Exchange Commission.

 

DaVita has appointed Banc of America Securities LLC of Bank of America Corp. (BAC), J.P. Morgan Securities LLC of JP Morgan Chase & Co. (JPM), Credit Suisse Securities (USA) LLC of Credit Suisse Group (CS), Barclays Capital Inc. of Barclays Plc (BCS), Goldman, Sachs & Co. of Goldman Sachs Group Inc. (GS) and Wells Fargo Securities LLC of Wells Fargo & Co. (WFC) as its joint book-running managers for the offering.

 

In addition, Credit Agricole Securities (USA) Inc., RBC Capital Markets Corp., Scotia Capital (USA) Inc. and SunTrust Robinson Humphrey Inc. are acting as co-managers for the offering.

 

 

Over the last 30 days, four of 11 analysts covering the stock have decreased their estimates for the third quarter of 2010, with one upward revision. Currently, the Zacks Consensus Estimate for the third quarter is operating earnings of $1.13 per share, which would be down by 6.5% from the year-ago quarter.

 

The higher number of downward estimate revisions for the third quarter indicates the likelihood of a negative trend in the performance of the stock in the near term.

 

With respect to earnings surprises, the stock has been almost steady over the last four quarters, with all three positive surprises. The average remained positive at 2.36%. This implies that DaVita has surpassed the Zacks Consensus Estimate by 2.36% over that period.

 

Overall, the headwinds from the debt refinancing coupled with the ongoing concerns related to payor mix and the uncertainties of operating under the new Medicare bundled payment system continue to raise caution around earnings volatility in the near-term. Nonetheless, with $550 million of expected free cash flow, the potential for meaningful M&A and the longer-term benefits of the bundle, we believe downside from current levels is likely limited.