Sun Healthcare mulls bond option for $197.5 million of new Sabra debt to fund spinoff

By Paul A. Harris and Sara Rosenberg

St. Louis, Aug. 25 - Sun Healthcare Group Inc. announced in a Wednesday press release that $197.5 million of debt financing backing its spinoff of Sabra Health Care REIT Inc. could come in the form of secured or unsecured bonds to be issued by Sabra.

The financing could also come in the form of secured bank debt or a revolving credit facility, in addition to long-term mortgage financing, according to the Wednesday news release.

"Sabra expects to put in place a capital structure that provides it with the flexibility to grow, and a cost of debt capital that allows it to compete for investment opportunities," the release stated.

Prior to completion of the spinoff, Sabra will incur additional debt that potentially will be secured by substantially all of its assets (other than assets securing mortgage debt).

The amount will depend on the net cash generated by Sun between July 1, 2010 and the spinoff.

Based on Sun's cash position as of June 30, 2010, and factoring in $224.8 million of proceeds from Sun's August 2010 equity offering to repay a portion of the outstanding term loans under its existing credit facility, Sun currently anticipates that Sabra will incur approximately $197.5 million of debt prior to completion of the spinoff.

Sabra's primary market risk exposure will be interest rate risk with respect to its expected debt following the spinoff, according to the release.

This will include debt that Sabra will incur prior to completion of the spinoff, and approximately $150 million of mortgage indebtedness to third parties on the properties that subsidiaries of Sabra will own following the spinoff. That amount increases to $162.5 million following a mortgage refinancing completed by Sun in August 2010.

As was previously reported, Sun is separating into two publicly traded companies, with the new Sun entity providing nursing, rehabilitative and related specialty health care services, and managing the rehabilitation therapy, medical staffing services and hospice businesses.

The other entity, Sabra, will own substantially all of Sun's currently owned real property portfolio and intends to operate as a real estate investment trust.

The separation will be done through a distribution to Sun stockholders of the common stock of the new Sun Healthcare Group.

The separation is expected to be completed in the fourth quarter, subject to regulatory, stockholder, final board and other approvals.

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