NEW YORK--(BUSINESS WIRE)--Fitch Ratings has assigned a 'BB/RR4' rating to LifePoint Health, Inc.'s (LifePoint) $400 million senior notes maturing in 2024. The proceeds will be used to refinance the 6.625% senior notes due 2020. The Rating Outlook is Stable. A complete list of ratings follows at the end of this release. The ratings apply to approximately $2.8 billion of debt at March 31, 2016.
KEY RATING DRIVERS
Relatively Low Leverage: At 3.8x total debt/EBITDA at March 31, 2016, LifePoint's leverage is amongst the lowest in the for-profit hospital industry, commensurate with the decent financial flexibility required for the 'BB' rating. The strength of the balance sheet provides the company with flexibility to pursue a growth-through-acquisition strategy; Fitch believes the company could increase debt to fund larger hospital purchases as it grows in size.
Acquisitions Driving Better Results: LifePoint Health, Inc. (LifePoint) remains primarily a rural market operator, but 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 improving trends in patient volumes and pricing, although operating margins have compressed as the company integrates less profitable acquisitions.
Improved Mix Lessens Headwinds: LifePoint's legacy hospital portfolio exposed the company to certain operating challenges. These included high volumes of uninsured patients, sensitivity to trends in low acuity conditions like the seasonal flu, declining levels of short-stay admissions and a greater macroeconomic sensitivity of patient demand. Fitch Ratings believes the company's improved geographic mix will drive better organic operating trends as an increasing number of the recent acquisitions are rolled into same-store results.
Strategy Not Without Challenges: The rapid pace of M&A does represent some challenges. Integrating 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. Furthermore, as with any inorganic growth strategy, there is some amount of integration risk involved.
Affordable Care Act Also Supporting Operations: LifePoint operates in markets that have historically had high exposure to uninsured patients, contributing to a significant financial headwind from uncompensated care. Only 10 of the 21 states in which LifePoint operates hospitals have so far opted to expand Medicaid programs, but the company has experienced a very marked decline in volumes of self-pay patients that appears to be durable; same-hospital self-pay admissions dropped 42% in the fourth quarter of 2014, and 11.1% in the fourth quarter of 2015.
KEY ASSUMPTIONS
--Fitch expects LifePoint to realize 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 became more difficult in the second half of 2015, and the tailwind from the ACA health insurance expansion is tapering.
--Fitch forecasts EBITDA of $824 million for LifePoint in 2016, including the contribution of recent acquisitions and year end leverage of 3.3x assuming a constant debt balance.
--Fitch expects LifePoint's operating EBITDA margin to contract by about 140 bps in 2016 versus the 2015 level. The drop in profitability is related to some negative operating leverage as recently strong volume growth recedes, as well as to the integration of less profitable acquired hospitals.
--Capital expenditures are forecasted at $400 million in 2016; 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 margin (CFO less capital expenditures and dividends) above 2% and absolute level of annual FCF at least $150 million throughout 2018 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 a FCF margin sustained below 2%. 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' rating. At March 31, 2016, LifePoint's liquidity included $187 million of cash on hand, $328 million of available capacity on its bank facility revolving loan and LTM FCF of $250 million.
LifePoint's LTM EBITDA to interest paid was solid for the 'BB' rating category at 7.0x and the company has ample operating cushion under its bank facility financial maintenance covenants, which require debt to be maintained below 4.5x EBITDA. Debt maturities are manageable. The next large maturity is the $628 million of term loans, which have a final maturity in July 2017.
FULL LIST OF RATING ACTIONS
Fitch currently rates LifePoint as follows:
--Issuer Default Rating 'BB';
--Secured bank facility 'BB+/RR1';
--Senior unsecured notes 'BB/RR4'.
The Rating Outlook is Stable.
Date of relevant committee: Oct. 7, 2015.
Additional information is available on www.fitchratings.com.
Applicable Criteria
Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 17 Aug 2015)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869362
Recovery Ratings and Notching Criteria for Non-Financial Corporate Issuers (pub. 05 Apr 2016)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=879564
Additional Disclosures
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1004391
Endorsement Policy
https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31
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