Coventry CFO says retiring 2012 notes is first priority for cash use

By Paul Deckelman

New York, June 22 - Coventry Health Care Inc. has what its chief financial officer calls an "excellent balance sheet position," especially following several recent debt transactions, giving the Bethesda, Md.-based managed-care company ample flexibility to pursue acquisitions or other opportunities as they arise.

Randy Giles, who is also the company's executive vice president and its treasurer, told attendees at the Wells Fargo Securities 2011 Healthcare Conference on Wednesday in Boston that Coventry completely paid down the $380 million balance on its revolving credit facility with the proceeds from its new $600 million of split-rated (Ba1/BBB-/BBB-) 5.45% senior notes due 2021, which priced at 99.8 on June 2 to yield 5.476%, or a spread of 245 basis points over the comparable Treasury issue.

He said that the remainder of the proceeds will be used for the redemption of Coventry's $234 million of outstanding 5 7/8% notes sometime before their scheduled maturity in January 2012. The company issued $250 million of the notes in 2005.

He said that when the 5.45% notes came to market, the company was "pleased" to see that the offering was 3.3 times oversubscribed by potential investors and that there was "a good mix" of new investors and holders of existing Coventry debt.

'High 20s' leverage

Giles said that including the newly issued bonds and the 2012 bonds being taken out, the company's capital structure currently has about $1.8 billion of bond debt. Besides those two issues, there is also outstanding $374 million of 6.3% senior notes due 2014, out of the $400 million originally issued in 2007, as well as $229 million out of the $250 million of 6 1/8% senior notes due 2015 sold in 2005 and $382 million of 5.95% senior notes due 2017, out of the $400 million issued in 2007.

The company's total leverage ratio of debt as a percentage of capital stood at 27.3% as of the end of the fiscal first quarter on March 31, and counting the recent transactions, it currently remains "under 30 [percent], somewhere the in high 20s," Giles said.

The CFO used the occasion of the conference to announce Coventry's latest debt deal: its entrance on Wednesday into a new $750 million five-year unsecured revolver following the previous paydown of the old revolver, as noted, using some of the bond issue proceeds. The revolver is undrawn at issuance, augmenting the company's liquidity position.

Giles said that as of the end of the first quarter, Coventry had $750 million of deployable free cash available. Figuring in the proceeds from the bond deal and anticipated cash flows from the second-though-fourth quarters, less the amounts used to pay down the old revolver and anticipated share repurchases during those quarters, Coventry is projecting having deployable free cash at the end of this year of about $1.3 billion, or 25% of the company's current market capitalization.

Company eyes acquisitions

Once the 2012 notes are taken out, Giles said that the company's next priority will be acquisitions. He said that Coventry sees "significant expansion opportunities, both in market and outside of our existing markets."

He said that "especially with the debt actions that we have recently taken," the company has "an excellent war chest to make those acquisitions and to pursue opportunities, and we're well positioned" to act upon them.

The CFO said that Coventry has "a suite of four national products," including workers compensation, Medicare part D and other kinds of health-care insurance programs, giving the company "a diversified revenue stream and cash flow. The best thing about that cash flow is it allows us, in a period of change, to adapt our strategies and to invest in areas that we see are becoming more attractive and pull back in those areas that are becoming less attractive as we go through the next several years, and I think that's very important in driving predictable earnings and cash flow streams."

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