Rotech shows signs of 'strength'

ORLANDO, Fla. - It looks like Rotech Healthcare will succeed in selling $230 million in senior secured notes--a sign, industry sources say, that Wall Street hasn't completely abandoned the HME industry.

On Sept. 27, Rotech announced that it intended to offer $225 million in notes. Two days later, Thomson Reuters, a financial news service, reported that the provider had lined up buyers for $230 million in notes at an 11.5% yield.

"I think it's a sign of strength that they're able to do this," said Rick Glass, president of Steven Richards & Associates. "The offering was even oversubscribed, allowing them to raise more funds than they expected."

On Sept. 30, Rotech announced that it expects to close the offering Oct. 6. The provider will use the money to repay $225 million in senior debt due Sept. 26, 2011. It also has $287 million in subordinated debt due April 1, 2012.

At the outset, it looked like the odds were stacked against Rotech.

"I have no idea who is going to make that kind of investment, not with what's going on in the industry right now," said Bruce Burns, president of Affinity Ventures in Albuquerque, N.M. "I don't know how they can show that they're going to make any kind of profit on a competitive bidding contract that's a 32% discount. Who's going to invest in that?"

Adding to doubts: Earlier this year, Apria tried but failed to arrange for a $500 million dividend recapitalization that would have allowed The Blackstone Group, which bought the provider in 2008 for $1.6 billion, to recoup much of its investment, according to industry watchers.

"Apria clearly has a better balance sheet right now and they couldn't pull it off," said one industry watcher. "So it's hard to imagine that Rotech would be successful."

But Glass wasn't surprised to see investors open their wallets. Rotech has had a good year, posting revenues of $124.3 million for the second quarter, up from $115.5 million for the same period last year, and a net income of $3.4 million, up from a net loss of $5.4 million.

"There's definitely been a significant improvement," he said. "That's when companies refinance--when things are looking good."

And what about competitive bidding? Rotech has won 17 contracts, but like Burns pointed out, they come at a deep discount.

"They have a plan for how they're going to survive and prosper in the years ahead and competitive bidding is part of that story," Glass said.

With a successful offering under its belt, Rotech could turn the corner, says Bob Leonard, an analyst with The Braff Group.

"They're quietly doing OK from an operations perspective," he said. "This, presumably, gives them the opportunity to be out of default and to create a structure that they can live with long term."

Rotech's not the only provider to make this move recently. American HomePatient (AHP) in September completed a self-tender offer to acquire all outstanding shares of its common stock. Highland Capital Management, AHP's largest shareholder, tendered the shares, paving the way for the firm to take 100% ownership.