TEXT-Fitch rates LifePoint Hospitals proposed loan 'BB+'
Jan 31 - Fitch Ratings has assigned a 'BB+' rating to LifePoint Hospitals, Inc.'s (LifePoint) proposed $225 million bank term loan. A complete list of ratings is provided at the end of this release. The ratings apply to approximately $1.7 billion of debt at Sept. 30, 2012. Proceeds of the new term loan are expected to be used to refinance the $225 million 3.25% convertible senior subordinated debentures due 2025, which are puttable to the company in February 2013. The proposed bank term loan is permitted based on the terms of the company's credit agreement, under which an accordion feature permits additional secured debt subject to a leverage ratio condition. SENSITIVITY/RATING DRIVERS --At 3.3x EBITDA at Sept. 30, 2012, LifePoint's gross debt leverage is amongst the lowest in the for-profit hospital industry. --Fitch expects debt could trend higher during 2013 as the result of funding acquisitions and a higher level of capital expenditures, but to remain consistent with the company's publicly stated leverage target of 3x-4x EBITDA. --Liquidity is solid. While lower profitability and higher capital expenditures could pressure the level of free cash flow (FCF; cash from operations less dividends and capital expenditures), Fitch expects it to remain above $150 million annually. --Organic operating trends in the for-profit hospital industry are presently weak, but Fitch expects the sector to benefit from the implementation of the Affordable Care Act (ACA) starting in 2014. LifePoint's recent hospital acquisitions are supporting growth for the company. SOLID BALANCE SHEET HELPS ACQUISITION STRATEGY LifePoint has consistently demonstrated a strong level of financial flexibility in recent years and at current levels the financial and credit metrics provide significant headroom within the 'BB' rating category. Gross debt leverage is among the lowest in the for-profit hospital industry. Pro forma for the proposed bank debt and pay-down of the convertible debentures, debt-to-EBITDA will equal 1.4x through the senior secured bank debt, 2.1x through the senior unsecured notes, and 3.3x through the senior subordinated convertible notes. Hospital acquisitions have recently been a top use of cash for LifePoint, consuming 50%, 30%, and 71% of CFO in 2010, 2011 and the LTM ended Sept. 30, 2012, respectively. Fitch estimates that the company's recent acquisitions will contribute about $240 million of revenue in 2012, or about 6.7% of the company's 2011 revenue before bad debt expense of $3.5 billion. In recent years, LifePoint has primarily used cash on hand to fund a series of small acquisitions, focusing on inpatient acute care hospital assets. With CFO trending around $350 million and capital expenditures around $225 million, Fitch estimates that LifePoint can fund two or three transactions with cash on hand annually. Fitch believes that LifePoint's relatively stronger balance sheet, coupled with a track record of successfully managing sole provider hospitals in rural markets, help make the company an attractive acquirer of hospitals in its preferred markets. However, Fitch does not believe that the company has a financial incentive to manage its balance sheet with debt below 3.0x EBITDA and expects leverage could trend higher in 2013 due to the funding of hospital acquisitions and share repurchases. GOOD FINANCIAL FLEXIBILITY A favorable debt maturity schedule and adequate liquidity also support LifePoint's credit profile. There are no debt maturities in the capital structure until 2014 when the $575 million senior subordinated convertible notes mature. At Sept. 30, 2012, liquidity was provided by approximately $98 million of cash, availability on the company's $350 million bank credit facility revolver ($280 million available), and FCF ($121 million for the latest 12 months period, defined as cash from operations less dividends and capital expenditures). Fitch projects that LifePoint's FCF will contract by about $30 million in 2012 versus the 2011 level of $182 million. This is because of lower profitability and higher capital expenditures. An expectation for a slight contraction in the EBITDA margin in 2012 is primarily because of the integration of less profitable acquired hospitals. RURAL MARKET RECOVERY LAGGING BROADER INDUSTRY LifePoint is the only pure-play non-urban hospital operator in the industry, with a sole-provider position in 52 of its 56 markets, although it has gained exposure in larger rural and small suburban markets through some of its recent acquisitions. Having sole-provider status in the vast majority of its markets confers certain benefits on LifePoint in capturing organic patient volume growth as well as in negotiating price increases with commercial health insurers. While LifePoint's organic patient volume growth has recently lagged the broader for-profit hospital industry, the company's results have not been inconsistent with the experience of other rural and suburban market hospital operators. While persistently weak organic volume trends across the industry began to show signs of improvement in the second half of 2011, providers in urban markets have exhibited a much stronger rebound in volume growth. LifePoint's management has attempted to address lagging volumes by focusing physician recruitment on fast-growing specialty areas and ramping up its outpatient services. This strategy appears to be having some effect since the company's organic volume growth improved slightly in the third quarter of 2012. Fitch notes that LifePoint's same-hospital net revenue growth of 1.3% in the third quarter of 2012 slowed relative to recent periods, primarily because of a weak trend in pricing. Same-hospital net revenue per adjusted admission was up only 2.9% year over year. This is concerning since strong trends in pricing have been supporting top-line growth for non-urban hospital providers in light of weak volume growth for the past several quarters. HEALTHCARE REFORM POSITIVE DRIVER IN 2014 The main provisions of the ACA that will affect the for-profit hospital industry include the mandate for individuals to purchase health insurance or face a financial penalty, and the expansion of Medicaid eligibility. These elements are currently expected to take effect in early 2014. Fitch expects an initially positive effect on the acute-care hospital industry because of the coverage expansion elements of the ACA, mostly as the result of reduced levels of uncompensated care, but also through a mildly positive boost to utilization of healthcare services. Over the several years following the coverage expansion, Fitch expects to see some erosion of the initial benefits due to a reduction in Medicare reimbursement required by the ACA, as well as likely lower rates of commercial health insurance reimbursement. WHAT COULD TRIGGER A RATING ACTION: LifePoint's current financial and credit metrics provide decent headroom within the 'BB' rating category. However, a positive rating action is unlikely in the near term unless Fitch believes the company will maintain its gross debt level at or below 3.0x EBITDA. A downgrade could result from gross debt to EBITDA being maintained above 4.0x and FCF generation remaining below $150 million annually. Drivers of higher leverage and lower cash generation could include leveraging acquisitions, difficulties in integrating recent acquisitions, and a persistently weak organic operating trend in the for-profit hospital sector. DEBT ISSUE RATINGS Fitch currently rates LifePoint as follows: --IDR 'BB'; --Secured bank facility 'BB+'; --Senior unsecured notes 'BB'; --Subordinated convertible notes 'BB-'. Additional information is available at 'www.fitchratings.com'. The ratings above were unsolicited and have been provided by Fitch as a service to investors. Applicable Criteria and Related Research: --'High-Yield Healthcare Checkup' (Jan. 16, 2013); --'Hospitals Credit Diagnosis' (Sept. 18, 2012); --'Corporate Rating Methodology' (Aug. 8, 2012); --'For-Profit Hospital Insights: Annual Review of Bad Debt Accounting Policies and Practices' (June 21, 2012); --'For-Profit Hospital Insights: Electronic Health Record Incentive Payments' (March 7, 2012). Applicable Criteria and Related Research: High-Yield Healthcare Checkup: Comprehensive Analysis of High-Yield U.S. Healthcare Companies -- Amended Hospitals Credit Diagnosis: Operating Trends Remain Weak but Solid Liquidity Supports Credit Profiles Corporate Rating Methodology For-Profit Hospital Insights: Fitch's Annual Review of Bad Debt Accounting Policies and Practices For-Profit Hospital Insights: Electronic Health Record Incentive Payments
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