Herbalife Nutrition Ltd. is preparing to offer up to $600 million worth of senior notes that could be used to fund its $1.5 billion share-repurchase program.
The company, which has at least 750 employees in Winston-Salem, said the notes have a fixed annual interest rate of 7.875% that will begin being paid March 1 and then every March 1 and Sept. 1 until due in 2025. The offering is projected to end May 29.
According to Investopedia, a senior note is defined “as a type of bond that takes precedence over other debts in the event that the company declares bankruptcy and is forced into liquidation. Because they carry a lower degree of risk, senior notes pay lower rates of interest than junior bonds.”
The notes will be guaranteed on a senior unsecured basis by each of the company’s existing and future subsidiaries.
A company typically buys back its shares from the marketplace to reduce the number of outstanding stock shares. Because there are fewer outstanding shares, those remaining can become more valuable. Companies also buy back shares when they believe the shares are undervalued.
Herbalife’s share price has ranged between $20.73 and $48.82 over the past 52 weeks. It closed down 67 cents Thursday to $43.36.
The company lists other potential uses of the proceeds are capital investment projects.
The last time Herbalife conducted such an offering of senior notes was in March 2018. The notes were valued at $550 million.
In the 2018 offering, Herbalife’s largest investor Carl Icahn agreed not to participate. At that time, Icahn owned 24.3%, or 22.87 million shares.
As of Dec. 31, Icahn owned 35.23 million shares for a 25.59 ownership stake.
In May 2018, Herbalife borrow funds to pay for a $600 million share-repurchase program representing 6.5% of its stock at that time.
In October 2018, the Herbalife board approved a new five-year, $1.5 billion share-repurchase program.
According to the company’s first-quarter regulatory report, it has not spent anything on the program as of March 31.
Bowman Gray IV, a local independent stockbroker, questioned the wisdom of the initiative.
“If they were able to borrow the money inexpensively, I would say yes, but given that they are paying 7.875%, I do not think this was a prudent move at all,” Gray said.
“Incurring such expensive debt should be cause for concern for existing shareholders.
“Average for an investment grade issue right now is less than 3% and the long term average is at 6.75%, so they are well above the norm for this market.”