NEW YORK--(BUSINESS WIRE)--Fitch Ratings does not expect any immediate change to Health Management Associates' (Health Management) ratings following a vote by shareholders to replace the entire Board of Directors. Fitch will review the ratings when there is better clarity on whether the shareholders are likely to approve the acquisition agreement with Community Health Systems (Community), as well as details of any plan by the new board to manage an operational turn-around of the company.
Health Management became the subject of takeover rumors earlier in the year following signs that Glenview Capital Management, LLC (Glenview), its largest shareholder, was unhappy with the company's management strategy. The for-profit hospital sector has been actively consolidating ahead of the implementation of the insurance expansion elements of the Affordable Care Act in 2014. The rationale for strategic acquisitions is enhanced by an expectation of higher patient volumes as well as lower levels of uninsured patients and uncompensated care.
Community announced its intent to acquire Health Management in a cash and stock deal valued at about $7.9 billion. The transaction is contingent upon approval of 70% of Health Management's shareholders. Glenview publicly stated that it viewed Community's offer as establishing a 'floor value' for the company. The shareholder believes that the replacement Board will be better able to determine whether the offer represents fair value for the company.
Community's offer values Health Management at about 8.2x LTM EBITDA. This valuation is consistent with other transactions recently announced in the for-profit hospital space, most notably Tenet Healthcare Corp.'s planned acquisition of Vanguard Health Systems for $4.3 billion valuing Vanguard at 7.9x LTM EBITDA.
Negotiating a higher acquisition price could be complicated by Health Management's recently weak operating trends and regulatory issues. Health Management reported Q2'13 results that included a 6.7% drop in hospital admissions and a 2.4% drop in admissions adjusted for outpatient activity. These organic volume results continue to lag industry peers; the company is also facing ongoing investigations into its hospital admissions and revenue recognition practices with both the DOJ and the SEC.
Fitch does not expect the change in the composition of the Board or the acquisition agreement with Community to result in an event of default or acceleration of Health Management's outstanding debt. The company previously negotiated waivers to its bank agreement change of control provision with lenders and the outgoing board has approved the income slate of directors, which should avoid triggering a change of control under the bond indentures.
Fitch rates Health Management as follows:
--IDR 'BB-';
--Senior secured bank facility 'BB+';
--Senior secured notes due 2016 'BB+';
--Senior unsecured notes due 2020 'BB-';
--Senior subordinated convertible notes due 2028 'B'.
All ratings are on Negative Watch.
Fitch placed the ratings on Negative Watch on July 18, following the filing of Glenview's proxy solicitation seeking to replace the Board of Directors. Fitch expects to resolve the Rating Watch when there is better clarity on whether shareholders are likely to approve the acquisition agreement with Community. In addition, any plan by senior management to address the industry lagging performance and regulatory investigations will be considered in resolving the Rating Watch.
Maintenance of a 'BB-' IDR for Health Management will require total debt-to-EBITDA generally sustained below 4.0x, coupled with a solid liquidity profile with a FCF margin sustained above 3%. At 4.1x total-debt-to-EBITDA at June 30, 2013, Health Management has little headroom in the metrics at the 'BB-' IDR.
A downgrade of the ratings or a Negative Outlook could result from deterioration in EBITDA or an increase in debt levels because of more aggressive management of the capital structure. Weak growth in EBITDA could result from a combination of:
--Persistently poor organic patient utilization trends in Health Management's largest hospital markets in the Southeastern U.S.;
--Topline headwinds due to reputational issues associated with the company's regulatory investigations and margin pressure due to increased legal fees and expenses;
--Operating disruptions or management distraction as a result of the BOD and management transition.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Hospitals Credit Diagnosis' (June 27, 2013);
--'The Affordable Care Act and Healthcare Providers: Assessing the Potential Impact' (May 1, 2013);
--'High-Yield Healthcare Checkup' (Jan. 30, 2013);
--'2013 Outlook: U.S. Healthcare' (Nov. 29, 2012);
--'Corporate Rating Methodology' (Aug. 8, 2012).
Applicable Criteria and Related Research:
Hospitals Credit Diagnosis (Implications of the ACA Slowly Taking Shape)
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=704315
The Affordable Care Act and Healthcare Providers (Assessing the Potential Impact)
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=706654
High-Yield Healthcare Checkup: Comprehensive Analysis of High-Yield U.S. Healthcare Companies
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=700377
2013 Outlook: U.S. Healthcare -- Navigating a Dynamic Operating and Regulatory Environment
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=695570
Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=715139
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