-- U.S.-based Tenet Healthcare Corp. is proposing to issue $500 million
senior secured notes due 2020 and $300 million of unsecured notes due 2020.
The company will use the proceeds to repay existing debt and for other
purposes including acquisitions.
-- We are revising the recovery rating on Tenet's existing senior secured
debt to '2' from '1' and lowering the issue-level rating to 'B+' from 'BB-'.
-- We are also assigning the new senior secured notes an issue-level
rating of 'B+' with a '2' recovery rating, and the new senior unsecured notes
an issue-level rating of 'CCC+' with a '6' recovery rating.
-- The stable outlook reflects our expectation that Tenet's operating
results will remain sluggish, with negligible free cash flow and little change
to the company's "aggressive" financial risk profile.
On Oct. 1, 2012, Standard & Poor's Ratings Services lowered its issue-level
rating on Dallas, Texas-based Tenet Healthcare Corp.'s senior secured
term debt to 'B+' from 'BB-'. We revised our recovery rating on its senior
secured debt to '2', indicating our expectation for substantial (70% to 90%)
recovery for lenders in the event of payment default, from '1'. The revision of
the recovery rating reflects our view of reduced recovery prospects for the term
loan because of the increased amount of senior secured debt.
At the same time, we assigned the new senior secured notes an issue-level
rating of 'B+' with a '2' recovery rating (70% to 90% recovery expectation).
We also assigned the new senior unsecured notes an issue-level rating of
'CCC+' with a '6' recovery rating (0% to 10% recovery expectation).
All other existing ratings, including the 'B' corporate credit rating, are
unchanged. The rating outlook is stable.
The 'B' rating on Tenet Healthcare Corp. is based on Standard & Poor's Ratings
Services' assessment of the company's business risk profile as "weak,"
reflecting significant reimbursement risk and a hospital portfolio with some
concentration risk. We consider the financial risk profile as "aggressive,"
reflecting leverage near 5x as well as the company's ongoing inability to
generate free cash flow. Tenet owns and operates 49 hospitals, over 100 free
standing outpatient centers, and a subsidiary that provides business process
solutions to health care providers.
The rating reflects our expectation that the hospital company's revenues in
2012 will increase by about 4% compared with reported revenue in 2011. This
estimation includes our assumption of a 3% organic growth rate, and one-time
revenue recognition of a global Medicare legal settlement. In our view,
Tenet's 2% growth in adjusted admissions midway through 2012 and
still-favorable 5% to 7% rate increases from private insurance companies
supports the company's organic growth. Year to date, revenues are up about 4%.
We expect the adjusted EBITDA margin to remain little changed at about 13%,
reflecting the company's efforts to offset reimbursement pressure with ongoing
cost control efforts. We expect leverage to decline slightly from the current
4.9x level by the end of 2012. This is because we expect EBITDA in the second
half of 2012 to be better than the first half because of certain expected
revenue sources in the second half.
For 2013, we expect revenue to increase by about 7%. Our expectation includes
the same organic growth rate as in 2012 but also incorporates our view that
Tenet will use proceeds from this latest financing for modest acquisition
activity that will generate additional 3% revenue growth. We believe margins
in 2013 could decline about 20 basis points (bps) to about 13%, and EBITDA may
increase by only 4% compared with 2012 because of the absence of one-time
revenues. This estimate includes our expectation for small Medicare rate
increase, no Medicaid payment increases, and 5% rate increases by private
insurance companies in 2013. We believe Tenet's acquisition activity may add
about $300 million of revenue in 2013.
Tenet's aggressive financial profile reflects the company's leverage and its
poor cash flow generation. We expect Tenet to have a cash flow deficit of
about $10 million in 2012, as defined by cash flow from operations minus
capital expenditures. We expect cash flow in 2013 to be about flat. Tenet's
cash flow has been negative for most of the past two years and may continue to
impair Tenet's ability to pursue a larger growth strategy without having to
rely on debt. In our view, Tenet's weak cash flow has lagged most of its
peers. This historical lack of appreciable free cash flow generation relative
to its size, coupled with our view of limited upside earnings potential
because of the difficult reimbursement environment, and general market
competitiveness, supports our view that debt reduction may be limited. We do
not believe Tenet is in a position to pursue any shareholder-friendly programs
without incurring additional debt and possibly increasing leverage.
Although Tenet operates facilities in a fairly sizable number of markets, we
view concentration risk as a key credit factor in our weak business risk
assessment. Sixty three percent of the company's beds are located in only
three states: Florida, California, and Texas. The exposure of California and
Florida to the extended weak national economy, shown by their high
unemployment and weak real estate trends, further highlights this risk. In
addition, Tenet operates in several large markets, such as St. Louis,
Philadelphia, and Houston, that we believe are quite competitive. This is a
disadvantage when comparing Tenet with other peer hospital companies that
focus on smaller, less competitive markets. Market competition for physicians,
favorable managed care contracts, and the influence of a weak economy are all
factors that contribute to Tenet's ongoing struggles to increase
Tenet's liquidity is adequate for its needs. Sources of cash are likely to
exceed uses of cash over the next 12 to 24 months. Our assessment of Tenet's
liquidity incorporates the following assumptions and expectations:
-- With sources exceeding uses by more than $250 million, we expect
coverage of uses to be about 1.9x in the next 12 to 18 months.
-- Sources of liquidity include about $700 million of unadjusted
operating cash flow before capital expenses and acquisition spending.
-- In addition, we expect Tenet to have about $650 million of
availability on its revolving credit facility after outstanding letters of
credit. This assumes Tenet completes its pending transaction and repays the
-- Despite higher cash balances following the transaction, we expect cash
to be rapidly deployed for acquisitions, and as a result, we are not counting
the upcoming $360 million increase in cash as a source of liquidity.
-- We expect uses of cash to include a moderate investment in working
capital, and capital expenditures of about $500 million.
-- With the completion of Tenet's pending debt transaction, the next
significant debt maturities are in 2015, and there is only one financial
covenant that is required only in the event that availability on its unrated
revolver falls below $100 million.
For the complete recovery analysis, see Standard & Poor's recovery report on
Tenet Healthcare Corp., to be published shortly on Ratings Direct.
Our rating outlook on Tenet is stable, reflecting expectations for continued
sluggish operating trends and negligible free cash flow. We could consider
raising the ratings only if Tenet can increase free cash flow to at least $200
million with prospects of at least that amount in subsequent years. This can
be accomplished by growth in funds from operations, improvements in working
capital, and reductions in other uses of cash when applicable, such as for
legal costs and reserves, and possibly lower interest costs via debt
refinancing. We believe the earliest this could occur might be 2014, only if
Tenet's margin increases by more than 200 bps. This is a key consideration
despite leverage below 5x.
We would consider downgrading the company if its efforts to maintain its
current financial risk profile and cash flow and liquidity weaken. In
particular, an increase in leverage to the high-6x area due to revenue and
margin pressure in the area of an estimated 400 bps margin decline, with
limited prospects for improvement, would be an unexpected negative credit
Related Criteria And Research
-- Methodology: Business Risk/Financial Risk Matrix Expanded, Sept. 18,
-- Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011
-- Criteria Guidelines For Recovery Ratings, Aug. 10, 2009
-- Standard & Poor's Revises Its Approach To Rating Speculative-Grade
Credits, May 13, 2008
-- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008
-- 2008 Corporate Criteria: Rating Each Issue, April 15, 2008
-- 2008 Corporate Criteria: Ratios And Adjustments, April 15, 2008
Tenet Healthcare Corp.
Corporate Credit Rating B/Stable/--
Senior Unsecured CCC+
Recovery Rating 6
Preferred Stock CCC
Tenet Healthcare Corp.
Senior Secured B+ BB-
Recovery Rating 2 1
Tenet Healthcare Corp.
$500M sr secd nts due 2020 B+
Recovery Rating 2
$300M sr unsecd nts due 2020 CCC+
Recovery Rating 6
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
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