By Steven Ralston, CFA
Yesterday, University General Health System (OTC Markets:UGHS) announced that on September 28th the company closed a $15.0 million line of credit and a $4.0 million term note with MidCap Financial, LLC, a Delaware limited liability company. University General accessed the entire $4 million term note and $12.3 million of the $15.0 million line of credit, significantly reducing interest expense and strengthening the company’s balance sheet.
The proceeds were utilized to repay $9.0 million of 6.5% borrowings from Amegy Bank, $2.125 million for the equipment lease with Regions Bank and $1.0 million of the 18% note purchase agreement from Sigma Opportunity Fund, LLC. With the line of credit’s rate being only 2.0% above LIBOR and the term note’s rate being 2.5% above LIBOR, University General is expected to save approximately $800,000 in interest expense annually. Also, $3.61 million was paid to the IRS curtailing the incurrence of additional interest and penalties and eliminating all of University General’s remaining payroll tax delinquencies.
By attaining this financing on such quite favorable terms attests to the favorable acceptance of management’s strategic plan of building, owning and operating regional health care networks in multiple, major metropolitan areas. The financing also provides the company with additional liquidity that will enable the accelerated execution of management’s aggressive acquisition strategy. As a result, University General is expected to expand its revenue base and level of profitability.
Not only do we reaffirm our Outperform rating and price target of $0.58, which is based the company attaining first quartile valuation metrics of price-to-sales and enterprise value-to-EBITDA, but also we confirm that this financing milestone increases our confidence level that University General Health System is a company that merits first quartile valuation.
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