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Tenet Junk Bonds Slide After Co. Cuts Outlook, Citing Tax Law

tenetBonds backing Tenet Healthcare were trading down across the board earlier today after the Dallas-based hospital operator cut its 2018 earnings-per-share outlook, as part of its Friday forecast on the implications of the recently enacted federal tax law.

While the issuer noted the change in U.S. tax law “is positive for Tenet from an economic perspective”—with cash tax payments expected to drop by $10–20 million per year “over the next several years,” due to the repeal of the corporate alternative minimum tax—the company substantially cut its 2018 EPS outlook to a range of $0.63–0.68, from previous guidance of $1.07–1.36.

Tenet attributed the revised outlook to the company “not being able to currently recognize for accounting purposes the future benefit related to the excess interest expense limitation carryforward, net of the benefit derived from the lower tax rate.”

The issuer’s 6.75% notes due 2023 and 7% notes due 2025 were off by 0.625 points and half a point, respectively, changing hands in blocks at 97.375 and 96.25, according to MarketAxess. Meanwhile, shares of Tenet Healthcare (NYSE: THC) were down as much as 5% in morning trading, falling to $14.66.

Tenet bonds have been on the upswing over the last two months, as Congress mulled cuts to corporate taxes, which Tenet views as “additive to free cash flow” over the next several years, due to reduced cash tax payments. The issuer’s 2023 tranche of unsecured notes had been trading as low as 90.5 in early November.

“While EPS will be lower due to the limitation on interest expense deductibility, this does not impact free cash flow, and over the next two to three years, we expect these changes will positively affect EPS due to the lower tax rate,” CEO Ronald Rittenmeyer noted in the Friday release.

As reported, Tenet bonds had previously slumped in October, after reports surfaced that the company had discarded previous plans to put itself on the auction block, with the company noting shortly after the departure of previous CEO Trevor Fetter that the decision “will allow Tenet to focus its efforts on selecting a permanent chief executive, who can make decisions about the long-term strategic direction of the company.” The news exacerbated broader credit-market pressures besetting hospital operators amid the cross-currents of U.S. legislative wrangling over healthcare policy.

Tenet Healthcare is a Dallas-based healthcare services company that operates hospitals and urgent care centers. — James Passeri

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