Healthscope noteholders' conundrum

The private equity owners of hospitals group Healthscope have asked eight investment banks to consider options for the sale of the company.

Healthscope issued $305 million of listed subordinated notes (Notes II, HLNGA) in March last year and $200 million of subordinated notes (Notes I, HLNG) in December 2010. There is provision in the documentation of both issues for the notes to be redeemed upon the sale of Healthscope or for conversion into ordinary equity should Healthscope be re-listed on the ASX.

Healthscope was taken private in March 2010 by TPG and The Carlyle Group. TPG was the owner of Myer, which was re-listed in 2009 at $4.10 a share and has not got close to this price since.

If Healthscope is sold by way of a trade sale or otherwise broken-up and disposed of in separate components, the holders of the Notes II will be entitled to have their notes redeemed at a 5% premium to face value plus accrued interest, provided the sale takes place before March 2015. If the sale occurs at a later date the redemption amount falls to $102.50.

Holders of the Notes I will only receive $102.5 plus accrued interest for their holdings.

However if there is an IPO, noteholders do not have an automatic right to convert their notes into shares but will be given priority over the general public in the allocation of shares. Moreover, noteholders will receive a 2.5% discount on the price paid for the shares.

This would appear to leave holders of the Notes II with a conundrum if an IPO occurs before March 2015, assuming bondholders are prepared to buy the business from the former owners of Myer. They can either have their notes redeemed at $105.00 (original face value is $100.00) or convert into Healthscope with a 2.5% discount on the offer price.

MYOB is another private equity business that is tipped for an IPO this year and has subordinated debt listed on the ASX (MYBG). MYOB, owned by Bain Capital, sold $155 million of subordinated debt in December 2012.

MYBG holders will have their notes redeemed at $103.00 if an IPO (or sale) occurs before December this year. Or they can receive a priority allocation of shares in the re-listed company at 2.5% discount to the offer price.

It is too late to buy the Healthscope Notes I and II, as they are already trading at a price that exceeds their conversion value and accrued interest. However, the MYBG notes have only traded at face value or a little above, just after they were issued.

The price of the notes has been moving up in recent weeks but it still below $100.

Philip Bayley is a former director of Standard & Poor's and now works as an independent consultant to debt capital market participants. He also writes on matters concerning debt capital markets and banking for various publications and is associated with Australia Ratings.