-- 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.
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
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.
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
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
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.
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.
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.
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
AHS Medical Holdings LLC
Corporate Credit Rating B/Stable/--
Ardent Medical Services Inc.
$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
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