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Here's Why Evolent Health Dropped 10% on Friday

By Brian Orelli, PhD - Aug 14, 2020 at 4:45PM

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A refinancing gone wrong?

What happened

Shares of Evolent Health (EVH -2.59%) closed down 10% on Friday after the healthcare company refinanced some convertible senior notes, which were due to be paid next year.

Refinancing convertible debt is usually a positive for companies as it delays the near-term possiblity of the notes being converted into shares, which would dilute current shareholders. But investors seem to think the deal Evolent negotiated isn't all that great, and the healthcare company didn't take care of all the potential dilution in 2021.

Pencil and calculator on a paper financial report.

Image source: Getty Images.

So what

Evolent Health is exchanging $84.2 million in convertible senior notes due in 2021, on which it was paying a 2% interest rate, for $84.2 million in convertible senior notes due in 2024, on which it'll have to pay an interest rate of 3.5%. Evolent Health also has to pay $2.5 million in cash to make the exchange happen. The new notes can be converted into stock at a conversion price of $18.23 per share, substantially higher than where the stock trades today.

In addition to the $84.2 million in 2024 notes, Evolent Health is issuing an additional $32.8 million of the new notes.

The company will receive approximately $27.4 million from the new notes after subtracting expenses and the $2.5 million it has to pay for the exchange. It plans to use some of the cash infusion to retire $14 million of the 2021 notes.

After exchanging $84.2 million in notes and repurchasing $14 million in notes, there will still be $26.7 million in 2021 notes outstanding.

Now what

The 10% decline today seems a little excessive; the new interest rate is higher than the old one, and the company had to bring some cash to the table, but 3.5% isn't a horrible rate.

Much of today's decline is probably tied to the fact that shares of Evolent Health have more than doubled since July. A little profit-taking is to be expected and not something that long-term investors should worry about.

Brian Orelli, PhD and The Motley Fool have no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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