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
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
--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
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
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
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.
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
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'.