NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed LifePoint Health, Inc.'s (LifePoint) ratings, including the Issuer Default Rating (IDR) at 'BB'. A complete list of ratings follows at the end of this release. The ratings apply to approximately $2.2 billion of debt at March 31, 2015. The Rating Outlook is Stable.
KEY RATING DRIVERS
--LifePoint's leverage (total debt to EBITDA) of 3.2x is amongst the lowest in the for-profit hospital industry. Coupled with strong and consistent free cash flow, this gives the company financial flexibility to pursue a fairly aggressive growth through acquisition strategy while maintaining credit metrics supportive of the 'BB' IDR.
--Starting in the second half of 2014, organic patient volumes in the for profit hospital sector dramatically improved following several years of depressed growth. However, Fitch believes the recently very strong operating performance is likely to taper, since certain secular headwinds remain intact.
--LifePoint's recent acquisitions have been in faster growing markets with a more favorable patient payor mix than the company's legacy markets, improving the business profile.
--There are headwinds to profitability. Some are industry-wide concerns, including the potential for negative operating leverage if recently strong volume performance subsides, and a reduction in cash payments for demonstrating meaningful use of electronic health records. Specific to LifePoint, the integration of a rapid succession of acquisitions is a drag on profitability.
Acquisitions Driving Better Results
While LifePoint remains primarily a rural and small suburban market hospital operator, the company has recently been deploying capital to buy hospitals in faster-growing markets, as well as making acquisitions to build out the network of facilities in certain of its existing markets. This strategy has contributed to stronger trends in patient volumes and pricing, evidenced by growth in pricing in continuing operations being markedly better than same-hospital results starting in 2014.
LifePoint's legacy portfolio exposed the company to certain operating challenges. These included high volumes of uninsured patients and uncompensated care, sensitivity to trends in low acuity conditions like the seasonal flu, and a greater macroeconomic sensitivity of patient demand. Fitch believes the company's improved geographic mix will translate into better organic operating trends as an increasing number of the recent acquisitions are rolled into same-store results in 2015 - 2016.
But Strategy Not Without Challenges
The rapid pace of M&A does present some challenges. Rolling in the newly acquired hospitals is a headwind to profitability since the company's typical target is a not-for-profit community hospital that operates with margins much below the legacy LifePoint group of hospitals. In Q1'15, the company's operating EBITDA margin dropped by 78 bps versus the prior year period, with management attributing much of the decline to the integration of acquisitions.
Hospital operators acquire properties with the intent of improving profitability over a period of several years. The source of margin improvement includes both the obvious sorts of cost synergies, as well as revenue synergies stemming from relationships with patients and health insurers. As with any inorganic growth strategy, there is some amount of integration risk involved, but LifePoint has a recently successful track record based on the margin improvements posted in the class of recently acquired hospitals.
Affordable Care Act Supporting Operations, Although Outlook is Uncertain
LifePoint operates in markets that have historically had high exposure to uninsured patients, contributing to a significant financial headwind from uncompensated care. Only nine of the 20 states in which LifePoint operates hospitals have so far opted into Medicaid expansion under the Affordable Care Act (ACA), but the company experienced a very marked decline in volumes of self-pay patients in these states; same-hospital self-pay admissions in Medicaid expansion states dropped 71% in the fourth quarter of 2014, and in all states by 42%.
There remains a significant amount of uncertainty regarding the ACA's ultimate impact on the hospital sector. Most immediately, the upcoming Supreme Court decision on the legality of financial subsidies for about 6 million health exchange plan enrollees, and future state Medicaid expansion decisions are major questions marks. However, any changes to the ACA are unlikely to be impactful enough to business profiles and financial flexibility to move the ratings of hospital companies in the medium term.
Good Balance Sheet Flexibility
At 3.2x at March 31, 2015, LifePoint's leverage is amongst the lowest in the for-profit hospital industry, commensurate with the decent financial flexibility required for the 'BB' rating. Leverage is down significantly over the past year due to EBITDA growth contributed by the recent acquisitions, and the repayment of some debt due in 2014, but Fitch thinks the company could increase debt to fund larger hospital purchases as it grows in size, as well as share repurchases.
KEY ASSUMPTIONS
Fitch expects low single digit organic topline growth through the forecast period. This incorporates an assumption that both patient volumes and pricing will show some pull back from the strong results of the past couple of quarters. Secular headwinds to growth in the hospital sector remain intact, comparisons will become more difficult in the second half of 2015, and the tailwind from the ACA health insurance expansion is likely to taper.
Fitch forecasts EBITDA of $704 million and free cash flow (FCF; CFO less capital expenditures and dividends) of about $200 million for LifePoint in 2015, including the contribution of recent acquisitions.
Fitch expects LifePoint's operating EBITDA margin to contract by about 100 bps in 2015 versus the 2014 level. The drop in profitability is related to some negative operating leverage as recently very strong volume growth recedes, as well as to the integration of less profitable acquired hospitals.
Capital expenditures are forecasted at $250 million in 2015; higher capital expenditures are related to capital commitments at recently acquired hospitals. In some cases, this is project-related spending, which will support future EBITDA growth.
FCF remains above $170 million throughout the forecast period despite higher capital expenditures.
The company deploys cash for both acquisitions and share repurchases; total debt is maintained at a level where leverage is consistently below 4.0x.
RATING SENSITIVITIES
A downgrade could result from gross debt/EBITDA being maintained above 4.0x and FCF generation sustained below $150 million annually. The most likely driver of a negative rating action is debt funding of capital deployment, including acquisitions and share repurchases, leading to leverage sustained above 4.0x. In addition, difficulty in the integration of recent acquisitions and the timing and level of funding of capital projects in new markets could weigh on FCF and the credit profile.
An upgrade to 'BB+' would be supported by the company operating with leverage below 3.0x. Fitch does not believe LifePoint currently has a financial incentive to operate with leverage at such a low level, and it is inconsistent with the company's recently more aggressive stance toward capital deployment for M&A and share repurchases.
LIQUIDITY
LifePoint's liquidity profile is supportive of the 'BB' credit profile. At March 31, 2015, LifePoint's liquidity included $282 million of cash on hand, $332 million of available capacity on its bank facility revolving loan and LTM FCF of $257 million. LifePoint's LTM EBITDA to gross interest expense was solid for the 'BB' rating category at 5.8x and the company has ample operating cushion under its bank facility financial maintenance covenants, which require debt to be maintained below 4.75x EBITDA.
Debt maturities are manageable. The next large maturity is the term loans, which have a final maturity in 2017. The terms of the bank agreement give LifePoint significant flexibility to issue additional debt, including debt secured on a basis pari passu with the bank agreement. The company is permitted to issue incremental term loans or secured notes up to a senior secured leverage ratio of 3.5x, with an $800 million carveout permitted regardless of the senior leverage ratio.
The indentures for the two outstanding series of senior unsecured notes due 2020 and 2021 allow additional secured debt up to a secured leverage ratio of 3.0x and 3.5x, respectively, plus a carveout of the greater of $200 million or 5% of total assets for the notes due 2020 and $300 million or 6% of total assets for the notes due 2021. Above this level, there is a springing lien provision that would result in the senior notes becoming equally and ratably secured. With a secured leverage ratio of 1.0x at March 31, 2015, LifePoint has significant capacity for secured debt under all of the debt agreements.
FULL LIST OF RATING ACTIONS
Fitch affirms LifePoint's ratings as follows:
--Issuer Default Rating at 'BB';
--Secured bank facility at 'BB+/RR1';
--Senior unsecured notes at 'BB/RR4'.
Note that Recovery Ratings (RRs) were assigned to the debt.
The Rating Outlook is Stable.
Additional information is available on www.fitchratings.com
Applicable Criteria
Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 28 May 2014)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749393
Recovery Ratings and Notching Criteria for Non-Financial Corporate Issuers (pub. 18 Nov 2014)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=813588
Additional Disclosures
https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=986315 Dodd-Frank Rating Information Disclosure Form
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=986315
Endorsement Policy
https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31
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