Tenet

(THC) - Get Report

has its hand out.

The ailing hospital chain -- expected to bleed cash this year and, quite possibly, next -- found a new source of money this week. The company is raising $500 million by selling senior unsecured notes through a private placement.

The move reminded some of the $1 billion debt offering Tenet carried out in early 2003, just months before it slashed its forecast and turned into a junk-rated company with a higher risk profile than some had bargained for. Tenet went on to lose $1.4 billion that year -- more than it earned the two previous years combined -- before finally adopting a drastic restructuring plan, involving the sale of more than one-quarter of its hospitals, in an effort to recover.

The company, still seeking buyers for all but two of those hospitals, said on Monday that it issued the new 10-year unsecured notes to pay off debt with earlier maturity dates and fund "general corporate purposes." It described the offering as a "normal liability management transaction" that allows it to refinance debt before interest rates rise. But some people wonder whether Tenet is really trying to raise cash for a big government fine to settle numerous allegations of wrongdoing.

"My guess is that the investment bankers told Tenet to raise money now instead of once the settlement is announced," said Jeff Villwock, an analyst for Caymus Partners who has been following Tenet on behalf of the Tenet Shareholder Committee for years. "Why do they think that's a good idea? Maybe they know the settlement is going to be worse than the market expects."

Tenet is under investigation for, among other things, possibly bilking Medicare and paying illegal kickbacks to physicians. It also faces hundreds of civil lawsuits for allegedly performing unnecessary -- and sometimes fatal -- heart surgeries on patients at its former hospital in Redding, Calif.

Last week, the

Los Angeles Times

reported that Tenet could wind up paying "more than $1 billion" to settle its myriad problems. But sources close to the government talks have told

TheStreet.com

to expect a higher global settlement fee of around $1.5 billion. They also point out that civil penalties at Redding, now expected to total around $500 million, are not included in that figure.

Villwock, for one, continues to warn of massive exposure.

"It's got to be something over $2 billion," Villwock said of Tenet's liabilities. "That's what we've said from the beginning."

Tenet spokesman Steven Campanini told

TheStreet.com

on Tuesday that it is too early to speculate about the "size or shape of a settlement with the

Justice Department or others." He also said that this week's bond offering is "in no way linked with recent market and media speculation" about a deal with the feds.

"Our new management team is working to resolve issues facing the company," Campanini assured, "but currently, there are no settlements in place. And we do not expect them any time soon."

Even Villwock said he would be "shocked" if Tenet reaches a deal this year. Still, Argus bond analyst William Eddleman wonders how Tenet can foot a $2 billion bill at all.

"That's a staggering amount -- especially for a company with negative cash flow," said Eddleman, who recommends selling Tenet's debt. "To assume the public security buyers are going to finance all that is a false assumption. They're not. I've seen too many bankruptcies, and it just doesn't work out that way."

But Tenet clearly plans to try. The company told investors during a March conference call that it will rely on the capital markets to finance a "good portion" of any major government settlement. Still, it said it would seek out the funds only after a deal was in place.

"It is much better to have a settlement in hand and then approach the market," CFO Stephen Farber explained. "That way, investors have a more definitive sense, postsettlement, what the financing needs are for the company, and we can raise the necessary money on better terms at that time."

Instead, some now believe, Tenet may be jumpstarting its efforts. Villwock admits that Tenet must use at least some of its new money to purchase bonds, because it publicly promised to do so, but he suspects that the company is primarily trying to build up cash on its balance sheet for other purposes.

Eddleman questioned whether Tenet could even find takers for the new notes. But Villwock says the company already has. He says the yield, hovering around the 10% range, is "very attractive to certain types of investors."

Villwock remains concerned about equity holders, however. He believes that some investors are banking on an

HCA

(HCA) - Get Report

-like turnaround that may never materialize. HCA, Tenet's larger peer, managed to recover from its own Medicare fraud scandal and move on.

"Yes, HCA did it," Villwock conceded. "But HCA had a real history of operating hospitals and doing it well. This company has no record -- ever in its corporate history -- of operating hospitals and doing it well without playing games. ... It's not a foregone conclusion that this management team can all of the sudden turn this company around."

Still, Villwock does believe that current management will find a way to strike a deal with the government -- with penalties paid out over time -- and still keep those at the top out of jail.

"Only in America can you steal from the government and then get a loan from the government -- that's tax-deductible -- to pay the money back," Villwock said. "It is a bizarre system that only encourages health care fraud."

Tenet's stock inched up 10 cents to $12.55 on Tuesday.