NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed its ratings for LifePoint Hospitals, Inc. (LifePoint), including the Issuer Default Rating (IDR), at 'BB'. The Rating Outlook is Stable. A full rating list is below; the ratings apply to approximately $1.7 billion of debt at March 31, 2012.
The ratings reflect the following:
--At 3.0x EBITDA at March 31, 2012, LifePoint's gross debt leverage is
the amongst the lowest in the for-profit hospital industry.
--Fitch
expects debt could trend higher at the end of 2012 as the result of
funding acquisitions and a higher level of capital expenditures, but
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)
generation, Fitch expects it to remain above $150 million annually. Debt
maturities for 2012-2013 are manageable.
--Organic operating trends
in the for-profit hospital industry are weak and Fitch expects them to
remain so throughout 2012. LifePoint's recent hospital acquisitions will
support 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, dropping to 3.0x EBITDA at March 31, 2012 as a result of growth in EBITDA primarily through the contribution of recently acquired hospitals. Debt-to-EBITDA equals 1.2x through the senior secured bank debt, 1.5x through the senior unsecured notes, and 3.0x through the senior subordinated convertible notes.
Fitch believes LifePoint's debt leverage could trend slightly higher at the end of 2012, but will remain consistent with the 'BB' rating category and below the upper end of the company's stated target leverage range of 3.0x-4.0x debt-to-EBITDA. A higher debt level would be the result of the funding of the company's recent hospital acquisitions.
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 in its preferred markets. However, based upon the relatively higher debt leverage levels of LifePoint's industry peers, Fitch does not believe that the company has a financial incentive to manage its balance sheet with debt below 3.0x EBITDA. LifePoint has some capacity under its bank facility financial maintenance covenants for additional debt. The bank facility requires total leverage of below 3.75x and interest coverage of above 3.5x.
GOOD FINANCIAL FLEXIBILITY
A favorable debt maturity schedule and adequate liquidity also support LifePoint's credit profile. Aside from the undrawn bank revolver, which matures in December 2012, there are no debt maturities in the capital structure until 2014. The $225 million senior subordinated convertible debentures due 2025 are puttable to the company in February 2013. Fitch expects the company to address the December 2012 maturity of its bank revolver in a manner that will provide financial flexibility to refinance the notes should holders put the notes to the company. Pending refinancing of the $575 million senior subordinated convertible notes due 2014, maturity of the $443 million bank term loan will be extended to April 2015 from February 2014.
At March 31, 2012, liquidity was provided by approximately $116 million of cash, availability on the company's $350 million bank credit facility revolver ($322 million available reduced for outstanding letters of credit), and FCF ($133 million for the LTM 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.
Capital investments in recently acquired hospitals and spending to implement electronic health records systems are driving a higher level of capital expenditures. LifePoint's capital expenditures as a percent of revenue ticked up to 6.2% in 2011 from 5.2% in 2010, and Fitch expects a higher level of spending to persist in 2012. A higher level of capital expenditures is consistent with the broader industry trend.
RURAL MARKET RECOVERY LAGGING BROADER INDUSTRY
LifePoint operates 55 acute-care hospitals, primarily located in rural markets. In 52 of its 55 markets, LifePoint's facility is the sole acute care hospital provider in the market. Having sole provider status in the vast majority of its markets confers certain benefits to 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 lagged the broader for-profit hospital industry in 2011, the company's results were not inconsistent with the experience of other rural and suburban market hospital operators. Across the Fitch-rated group of for-profit hospital providers, same-hospital admissions adjusted admissions (a measure that is adjusted for outpatient activity) grew by 0.4% in 2011. LifePoint's same adjusted admissions were down 0.4% during the same period.
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. Systemic issues outside of management control, such as weak seasonal flu and obstetrics volumes, seem to be driving the relatively weaker organic growth in rural markets.
HEALTHCARE REFORM DRIVING INDUSTRY VALUE PROPOSITION
Fitch does not expect the pending Supreme Court decision on the Affordable Care Act (ACA) to have an immediate effect on the credit profile of the for-profit hospital industry. Regardless of the Court's decision, the industry is expected to continue to move toward a care delivery model focused on quality and reducing the cost of care, as opposed to the largely volume-driven reimbursement model that is in place today.
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. If these provisions survive the judicial and legislative challenges to their existence, they will take effect in 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.
GUIDELINES FOR FURTHER RATING ACTIONS
Maintenance of a 'BB' IDR for LifePoint will require debt-to-EBITDA maintained at or below 4.0x, coupled with a sustained solid liquidity profile, with FCF sustained above $150 million annually. A leveraging acquisition or deterioration in financial flexibility resulting from difficulties in integration of its recent acquisitions would be the most likely causes of a negative rating action for LifePoint. Also of concern is the potential for a sustained weak organic growth trend for the hospital industry, which could erode profitability and financial flexibility over time.
DEBT ISSUE RATINGS
Fitch has taken the following actions on LifePoint's ratings:
--IDR affirmed at 'BB';
--Secured bank facility affirmed at 'BB+';
--Senior
unsecured notes affirmed at 'BB';
--Subordinated convertible notes
affirmed at '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:
--'Corporate Rating
Methodology' (Aug. 12, 2011);
--'For-Profit Hospital Insights:
Fitch's Annual Review of Bad Debt Accounting Policies and Practices'
(June 21, 2012);
--'For-Profit Hospital Quarterly Diagnosis' June
6, 2012;
--'For-Profit Hospital Insights: Electronic Health Record
Incentive Payments' March 7, 2012;
--'2012 Outlook: U.S.
Healthcare' (Dec. 7, 2011).
Applicable Criteria and Related Research:
Corporate Rating
Methodology
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=647229
For-Profit
Hospital Insights: Fitch's Annual Review of Bad Debt Accounting Policies
and Practices
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=681330
2012
Outlook: U.S. Healthcare -- Accelerating Regulatory and Fiscal Challenges
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=659178
For-Profit
Hospital Insights: Electronic Health Record Incentive Payments
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=673291
For-Profit
Hospital Quarterly Diagnosis
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=680916
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