TEXT-S&P rates Ardent Medical's first-lien debt

Fri Nov 9, 2012 5:00pm EST

Overview
     -- U.S.-based Ardent Medical Services Inc. is issuing debt to finance the 
acquisition of a majority interest in Baptist St. Anthony's Health System in 
Amarillo, Texas, and to refinance all of its existing debt. 
     -- This activity is consistent with our expectation that Ardent would be 
actively seeking to expand into new markets. 
     -- We are assigning Ardent's proposed senior secured first-lien credit 
facility our 'B+' issue-level rating with a recovery rating of '2'. We are 
assigning Ardent's proposed senior secured second-lien term loan our 'CCC+' 
issue-level rating with a recovery rating of '6'.
     -- The outlook remains stable, reflecting our expectations for sustained 
modest growth, steady margins, and disciplined acquisition activity.

Rating Action
On Nov. 9, 2012, Standard & Poor's Ratings Services affirmed its 'B' corporate 
credit rating on Nashville, Tenn.-based AHS Medical Holdings LLC (fka, Ardent 
Health Services LLC). The outlook is stable. At the same time, we assigned 
Ardent's proposed $725 million first-lien term loan B and $120 million 
revolving credit facility our 'B+' rating (one notch higher than the 'B' 
corporate credit rating), with a recovery rating of '2', indicating our 
expectation for substantial (70% to 90%) recovery in the event of payment 
default.

We also assigned Ardent's proposed $175 million second-lien term loan B our 
'CCC+' rating (two notches lower than the 'B' corporate credit rating), with a 
recovery rating of '6', indicating our expectation for negligible (0% to 10%) 
recovery in the event of payment default.
Rationale
The ratings on AHS Medical Holdings LLC reflect Standard & Poor's Ratings 
Services' view that the company has a "highly leveraged" financial risk 
profile, because of its growth agenda and pro forma leverage of about 5.4x, 
and a "weak" business risk profile, reflecting its relatively undiversified 
portfolio and uncertain reimbursement environment. The financial risk profile 
descriptor has been revised from "aggressive" due to the increase in leverage 
associated with the debt financing for the large acquisition in Amarillo, 
Texas. The revision of the business risk profile from "vulnerable" reflects 
our view of an improvement in Ardent's business profile, as this acquisition 
provides Ardent with a leading market share in a new market, adding greater 
market diversity.
We expect this latest acquisition to help Ardent drive a nearly 11% revenue 
increase for the full-year 2012 and a 15% revenue increase in 2013. We believe 
the lease-adjusted EBITDA margin in 2013 will be about 9%. This estimated 
50-basis-point improvement from 2012 will be aided by the higher margins that 
the acquired hospital system in Amarillo will generate. We believe Ardent's 
organic growth rate will remain in the low- to mid-single-digit area and that 
over time acquisitions will remain a prominent strategy as the company 
supplements growth and expands its business profile to additional markets. We 
expect any acquisitions in 2013 to remain small because the increase in 
leverage leaves Ardent with little debt capacity and because we expect Ardent 
to be busy integrating the Amarillo acquisition. We believe reimbursement 
constraints in the form of low rate increases from Medicare, virtually no 
increases from state Medicaid programs, and low- to mid-single-digit increases 
from private insurance companies will contribute to relatively flat margins 
beyond 2013. We expect these margin expectations and low organic growth rate 
to keep leverage above 5x for the next two years. 
We view Ardent's financial risk profile as highly leveraged, reflected in our 
view of debt to EBITDA for 2013 at 5.4x and funds from operations to 
lease-adjusted debt of about 11%. Leverage also includes Ardent's $75 million 
of preferred stock as debt, consistent with our criteria. By our estimation, 
Ardent will generate about $10 million of free cash flow before any 
acquisition activity.
Ardent's business risk is weak, because of its still relatively undiversified 
portfolio of hospitals, uncertain reimbursement, and concentration in 
competitive markets. Ardent operates in Albuquerque, N.M., Tulsa, Okla., and 
Amarillo, Texas. The Albuquerque market, still representing over 50% of total 
revenue even after the Amarillo acquisition, is very competitive, particularly 
because of its unique market dynamic, whereby the competitors are organized as 
integrated delivery systems that closely align physicians and health plans. 
This also subjects Ardent to the risk of commercial insurance contract losses, 
and the risks of managing the health care costs of the membership of its 
health plan. In addition, Ardent's markets are relatively competitive. As 
evidence of the local market competitiveness, Ardent has expended significant 
resources in both Albuquerque and Tulsa to fortify local competitiveness. For 
example, the acquisition of Roswell Regional Hospital in New Mexico added 
little diversity, because it is small, but its primary purpose is to serve 
Ardent's health plan members in that area.  The improvement in Ardent's 
business profile makes it more comparable to other peer hospital companies, 
such as IASIS Healthcare Corp. and Vanguard Health Systems Inc., though those 
companies still operate in more markets than Ardent.  
Liquidity
Ardent's liquidity is adequate. Sources of cash are likely to exceed uses of 
cash over the next 12 months. Relevant aspects include:
     -- We believe sources will cover uses by 2.4x during 2013. However, that 
could deteriorate if unexpected reimbursement or regulatory developments cause 
EBITDA to sharply contract, weakening funds from operations, or with further 
acquisition activity. Sources include balance sheet cash, availability of its 
$120 million revolver, and free cash flow. Uses include working capital needs 
and about $80 million of capital expenditures
     -- A portion of its cash is related to a mandatory reserve requirement, 
and excluded from our liquidity analysis.
     -- We do not think Ardent will need its revolver to meet its liquidity 
needs over the next year. 
     -- For the next 12 months, there are no significant debt maturities.
     -- Based on our expectation of earnings growth in 2013, we expect Ardent 
to maintain its adequate covenant cushion under its new credit agreement.
Recovery analysis
The rating on Ardent's revolving credit facility and first-lien term loan is 
'B+' (one notch higher than the corporate credit rating on Ardent), with a 
recovery rating of '2', indicating the expectation for substantial (70% to 
90%) recovery in the event of a payment default. The rating on the second-lien 
term loan is 'CCC+' (two notches lower than the corporate credit rating), with 
a recovery rating of '6', indicating the expectation for negligible (0 to 10%) 
recovery in the event of a payment default.

Outlook
Our stable rating outlook on Ardent reflects our expectations for sustained 
modest growth, steady margins, and disciplined acquisition activity. Since we 
believe slow organic growth and margin pressure will limit improvement in the 
company's financial risk profile over the next two years, and that the company 
will continue to pursue growth via acquisition, we believe the most likely 
path to a higher rating is for any large acquisition to be financed with 
additional equity infusion. We believe this scenario could result in leverage 
falling below 5x on a sustainable basis, a level we believe is a prerequisite 
for a higher rating. We could lower our rating if business pressures such as 
unanticipated adverse reimbursement changes, competitive factors that could 
cause a loss of business, or other unforeseen difficulties cause a 
200-basis-point decline in EBITDA margin. We believe that such a decline could 
raise leverage to above 7x, result in negative cash flow, and possibly impair 
liquidity if this results in a slim loan covenant cushion. 
Related Criteria And Research
     -- Business Risk/Financial Risk Matrix Expanded, Sept. 18, 2012
     -- Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011
     -- Criteria Guidelines For Recovery Ratings, Aug. 10, 2009
     -- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008
Ratings List
New Rating

AHS Medical Holdings LLC
 Corporate Credit Rating                B/Stable/--        

Ardent Medical Services Inc.
 Senior Secured
  $725 mil 1st lien term B ln due 2017  B+                 
   Recovery Rating                      2                  
  $175 mil 2nd lien term B ln due 2018  CCC+               
   Recovery Rating                      6                  
  $120 mil 1st lien revolver due 2017   B+                 
   Recovery Rating                      2                  

Ratings Affirmed
Ardent Medical Services Inc.
 Senior secured debt                    B                  
   Recovery Rating                      3                  

Complete ratings information is available to subscribers of RatingsDirect on 
the Global Credit Portal at www.globalcreditportal.com. All ratings affected 
by this rating action can be found on Standard & Poor's public Web site at 
www.standardandpoors.com. Use the Ratings search box located in the left 
column.
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