TEXT-Fitch affirms Health Management Associates
Oct 23 - Fitch Ratings has affirmed Health Management Associates' (Health Management) 'BB-' Issuer Default Rating (IDR) and senior debt. A full list of ratings follows at the end of this release. The ratings apply to approximately $3.6 billion of debt at June 30, 2012. The Rating Outlook is Stable. Health Management's ratings reflect the following main credit factors: --The company has good financial flexibility and solid cushion in its credit metrics in the 'BB-' rating category. Maintenance of the rating will require debt generally maintained at or below 4.0x EBITDA. --After an increase in debt to partially fund an acquisition in Q3'11, leverage increased to 4.2x at the end of the year. However, the level has declined due to EBITDA growth and amortization of the bank term loans and Fitch forecasts total debt-to-EBITDA of 3.7x at the end of 2012. --Liquidity is solid. Refinancing of the debt structure in late 2011 addressed a 2014 maturity wall and improved flexibility under the bank agreement financial maintenance covenants. --Organic operating trends in the for-profit hospital industry are weak and Fitch expects them to remain so into 2013. Fitch sees the potential for 2% sequestration of Medicare payments starting in January 2013 under a fiscal cliff scenario as the next significant risk to the industry's operating profile. --Health Management's strategy of growing through hospital acquisitions has been successful in augmenting weak organic top-line growth and diversifying its operations outside of its south Florida markets. INDUSTRY CONSISTENT OPERATING TRENDS Throughout 2009 and into 2010, Health Management led the for-profit hospital industry in organic patient volume growth, demonstrating improvements in its operations. While these improvements continue to benefit Health Management's results, its organic operating trends have been more in-line with other hospital companies with operations focused on non-urban markets since the second half of 2010. Organic patient volume growth has been weak, but strong growth in pricing in is supporting organic topline growth. An ongoing shift to outpatient volumes as well as effective cost control has aided Health Management's profitability and cash flow generation. Health Management generates half its revenues from outpatients, which is a significant support to its profitability. Fitch believes the organic growth outlook for some of Health Management's older markets in South Florida is relatively weak. Health Management has 22 of its 70 hospitals in the state of Florida and unemployment rates in the South Florida region remain above the national average. Offsetting this concern, the company has recently focused its investments in faster growing markets outside of Florida. Its 2011 - 2012 capital investments included acquisitions of a five-hospital system in Oklahoma and a seven-hospital system in Knoxville, Tennessee and the construction of replacement hospitals in its Mason, Georgia and Poplar Bluff, Missouri markets. GROWTH THROUGH ACQUISITIONS STRATEGY While the company remains focused on its operations, organic growth tapered significantly starting in 2011 to a rate more consistent with the industry, and the company shifted its focus to augmenting growth through hospital acquisitions. Health Management has made acquisitions contributing a cumulative $1.4 billion of revenue since late 2009. This represents around 30% of the company's 2009 revenue. The company's rate of revenue and EBITDA growth outpaced its peers in 2011 - 2012 due to the contributions of recent acquisitions. Health Management has only completed one major acquisition so far in 2012 and management has indicated that going forward the company's goal is to complete two-to-three transactions per year that add $500 million in revenue. INCREASED LEVERAGE FOR ACQUISITIONS While the company will not meet its target for acquisitions in 2012, Fitch expects its activity to ramp up heading into 2013 and thinks that the schedule of completion and funding of acquisitions could continue to be quite variable. Health Management will probably continue to favor acquisition of smaller not-for profit or municipally-owned hospitals in markets where it has an existing presence. Health Management's 2011 - 2012 acquisitions cost between 65% and 90% of acquired revenue and Fitch projects ongoing free cash flow (FCF, cash from operations less capital expenditures and dividends) generation for the company of about $240 million. Assuming a similar cost of funding of future acquisitions, this forecast implies that the company could acquire in the range of $270-$370 million of revenue out of FCF. This means that debt could trend higher in the near-term if the company meets its acquisition goal. Health Management has been willing to increase debt to fund acquisitions in the past. The Dec. 31, 2011 total debt level of 4.2x EBITDA was affected by the debt financing of a $525 million acquisition of a seven-hospital system in Knoxville, TN, in Q3'11. However, leverage dropped back below 4.0x by June 30, 2012 due to growth in EBITDA and required amortization of the bank term loans. Fitch projects year-end 2012 total debt-to-EBITDA of 3.7x and EBITDA to gross interest expense of 4.1x. LIQUIDITY PROFILE IS SOLID Health Management completed a comprehensive refinancing of its debt structure in Q4'11. The debt refinancing improved the credit profile by removing the 2014 bank debt maturity wall and creating a more balanced capital structure. The proportion of secured debt in the capital structure dropped to 70% from 95%, representing an improvement in credit quality for the secured lenders. Health Management's nearest significant debt maturity is now in 2016. The company has ample room under its bank facility financial maintenance covenants, which require total debt-to-EBITDA maintained below 5.5x and interest coverage above 3.25x. At June 30, 2012, Health Management's liquidity was provided by cash and short-term investments of $156 million, $450 million of availability under the $500 million bank revolver and LTM FCF of $200 million. Fitch projects full year 2012 FCF of about $240 million for Health Management. Lower use of cash for working capital and a higher projected amount of electronic health record incentive payments in the second half of 2012 resulted in the expected boost in FCF versus the LTM level. RATING TRIGGERS Maintenance of a 'BB-' IDR for Health Management will require total debt-to-EBITDA sustained around 4.0x, coupled with a solid liquidity profile with interest coverage of above 4.0x and a FCF margin of at least 3.0%. Positive rating triggers would include debt maintained below 3.5x EBITDA. Fitch believes this is unlikely given the company's stated intent to complete two-to-three acquisitions per year. Although FCF generation is adequate to fund a good amount of acquisitions, the company has demonstrated its willingness to increase debt to fund acquisitions. A downgrade of the ratings could be the result of further deterioration in the hospital industry's organic operating trend if Fitch expects associated erosion in HMA's profitability and financial flexibility to result in debt maintained above 4.5x EBITDA. This could be the result of a fiscal cliff scenario in 2013, causing very weak growth in Medicare payments and a worsening of macro-economic conditions. An increase in unemployment rates in Health Management's major markets in the southeastern U.S. would be particularly concerning, since this could lead to a worsening trend in the company's already fairly weak organic patient volume growth. DEBT ISSUE RATINGS The secured debt is rated 'BB+', two notches above the IDR, and includes the bank agreement debt and the senior secured notes due 2016. The two notch distinction above the IDR is supported by the over collateralization of the secured debt by the assets of the guarantor group of subsidiaries. At June 30, 2012, the guarantor subsidiaries represented about $3.6 billion of consolidated assets and there was $2.5 billion of secured debt in the capital structure. The 'B' rating on the senior subordinated convertible notes, two-notches below the IDR, reflects the high proportion of debt ranking ahead of these notes in the capital structure, which would result in weak recovery for the note holders in a workout scenario. Fitch affirms Health Management's ratings as follows: --IDR at 'BB-'; --Senior secured bank facility, including a $500 million revolving credit facility, $1 billion term loan A and $1.2 billion term loan B; at 'BB+'; --Senior secured notes at 'BB+'; --Senior unsecured notes at 'BB-'; --Senior subordinated convertible notes at 'B'.
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