HealthSouth says balance-sheet changes give it 'flexibility' to weather 'uncertain' environment

By Paul Deckelman

New York, Sept. 11 - With talk about the long-term viability of Medicare and the impact of possible changes to that system having suddenly become a hot-button topic in this year's elections, investors in HealthSouth Corp. face some headline risk - which its chief executive officer says is par for the course for just about any health-care company these days.

But Jay Grinney told investors at the Morgan Stanley Global Healthcare Conference on Tuesday in New York that "there are going to be winners going forward, and there are going to be losers. And those who haven't focused on the balance sheet don't have a disciplined cost structure and don't have the scale - I think they're at risk."

Grinney definitely counts his own company, a Birmingham, Ala.-based operator of post-acute-care rehabilitation hospital facilities, in the former category rather than the latter.

He said that "even in a [Medicare reimbursement] rate environment that is very tight, the demand for services is not going to go away. So those who are successful, or who will be successful, are those who are focused on the balance sheet over the last five years. They don't have any near-term maturities. They're not burdened with excessive interest expense. There's flexibility in their business model, and they have a cost structure that allows them to take patients on a highly incremental and profitable basis."

Recent deals boost company

Grinney, who also is the company's president, indicated that HealthSouth has recently been active in the capital markets to bolster its financial position and overall flexibility.

He noted that last month, it amended its senior secured credit facility agreement to increase the size of its revolving credit line to $600 million from $500 million while at the same time terminating its $100 million term loan.

As part of that amendment, HealthSouth also extended the revolver's maturity date to August 2017 from May 2016, reduced pricing by 50 basis points to the current rate of 175 bps over Libor and increased the accordion provision that under certain conditions allows an increase in the revolver's size to $300 million from $200 million. Other covenant provisions were also loosened.

And just last week, he added, "we were out in the market and took advantage of very favorable market conditions," selling $275 million of 5¾% senior notes due 2024. That quickly shopped deal, upsized from an originally announced $250 million, priced at par on Thursday.

During the question-and-answer portion of the presentation following his formal presentation, Grinney elaborated on the balance-sheet maneuvering, saying that "we're pleased with what we've been able to do with respect to that capital structure. We've looked at not only how much debt do we have, but what are the maturities of that debt, and we've created, I think, a very flexible structure."

No near-term maturities

The CEO pointed out that the company's first maturity doesn't come up for nearly five years, August 2017, when the revolver matures.

After that, he said, starting in 2018 and continuing every other year, the company will have between $270 million to $300 million of different notes maturing.

He said that some of the proceeds from the recent bond deal will be used to call a portion of its 7¼% senior notes due 2018 and its 7¾% senior notes due 2022 for redemption. "We've got the ability to call 10% of the outstanding balance, and so we will exercise that [to] take [the balance] of those two notes down by 10%."

Grinney said that "we've created a very strong balance sheet that I think will give us a lot of flexibility going into the next couple of years, which will undoubtedly will be characterized by a lot of uncertainty."

As to the cost structure, Grinney said that "our flow-through [cost] on every new dollar of revenue that we get in is anywhere from 30% to 40%, so we can bring a patient in and get a dollar in revenue and only have to spend 35 cents of additional costs. I don't know too may providers that have that kind of flexibility in their cost structure."

Asked to outline his priorities for using the company's cash flow, Grinney said that "first and foremost," the company would be looking to expand, whether via adding beds to existing facilities, building new facilities or through acquisitions.

After that on the priority scale are other alternatives, including buying out the leases on some of its facilities that it does not already own but only rents, as well as more debt repayment, buying back common shares or buying back up to $125 million of its convertible preferred stock.

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