NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed LifePoint Health Inc.'s (LifePoint) ratings, including the 'BB' Issuer Default Rating (IDR). The Rating Outlook is Stable. A complete list of rating actions follows at the end of this release. The ratings apply to approximately $2.8 billion of debt at March 31, 2016.
KEY RATING DRIVERS
Decent Balance Sheet Flexibility: 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 Improve Mix: 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 organic topline growth, but operating margins have compressed as the company integrates less profitable acquisitions.
Evolving Business Risk Profile: LifePoint's legacy hospital portfolio exposes the company to certain operating challenges. These included high volumes of uninsured patients, seasonal sensitivity to trends in conditions like the flu, declining levels of short-stay admissions and a greater macroeconomic sensitivity of patient demand. Fitch believes the company's acquisition strategy should reduce exposure to the types of lower acuity hospital patient volumes that are highly susceptible to these headwinds.
But Strategy Not Without Challenges: The rapid pace of M&A does represent some challenges that add risk to the credit profile. 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 lower margins than the legacy LifePoint group of hospitals. Capital expenditure commitments are a headwind to free cash flow generation (FCF) generation, and as with any inorganic growth strategy, there is integration risk.
Headwinds to Cash Generation: Hospital operators can experience an A/R build up if there is a bureaucratic delay in receiving a Medicare provider number for a recently acquired hospital. Due to the rapid pace of acquisitions, LifePoint has recently experience a build-up in A/R due to the latter. Fitch is forecasting a greater than 50% drop in LifePoint's FCF during 2016, due to increased use of cash for working capital, higher capital expenditures, and lower profitability. Lower profitability is the result of secular headwinds to profitability in the hospital sector (reduced readmissions, fewer short stay admissions), the integration of less profitable hospitals, and lower cash payments for demonstrating meaningful use of electronic health records as the schedule of federal government payments winds down.
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 22 states in which LifePoint operates hospitals have so far opted to expand Medicaid programs (an eleventh, Louisiana, will expand eligibility on July 1), 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 (4Q14), and 11.1% in 4Q15.
KEY ASSUMPTIONS
--Fitch expects LifePoint to realize low single-digit organic topline growth through the forecast period. This incorporates an assumption that patient volumes will continue to suffer from secular headwinds to growth of lower acuity cases. LifePoint's legacy rural hospital markets are highly susceptible to this trend;
--Fitch forecasts EBITDA of $824 million for LifePoint in 2016, including the contribution of recent acquisitions, and year end leverage of 3.7x pro forma for recent debt issuance activity;
--Fitch expects LifePoint's operating EBITDA margin to contract by about 140 basis points (bps) in 2016 versus the 2015 level. The drop in profitability is primarily related 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 of about $150 million throughout 2018 despite higher capital expenditures;
--The company deploys cash for both acquisitions and share repurchases in 2016-2018; 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 an FCF margin sustained below 2%; Fitch currently forecasts a FCF margin of 2% to 2.5%. LifePoint's liquidity remains supportive of the 'BB' rating, but a forecasted drop in profitability and the FCF margin have eroded the margin for error in the operations at this rating level. 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
The most concerning aspect of LifePoint's liquidity profile is the forecasted drop in FCF. The company has adequate sources of liquidity, the debt maturity profile and debt agreement covenant compliance are not concerning. 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 latest 12 months (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 now requires total debt to be maintained below 5.0x EBITDA.
Debt maturities are manageable. On June 10, 2016, LifePoint refinanced its bank facility. The term loan and revolver maturities were pushed out to June 2021 from July 2017, and the revolver was upsized to $600 million. Some of the terms and covenants were changed, including a relaxing of the total leverage financial maintenance covenant. At current leverage levels, pricing on the refinanced facility is LIBOR+175 bps.
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 three outstanding series of senior unsecured notes due 2021, 2023 and 2024 allow additional secured debt up to a secured leverage ratio of 3.5x, plus a carveout of the greater of $300 million or 6% of total assets. 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 1.1x at March 31, 2016, LifePoint has significant capacity for secured debt under all of the debt agreements.
FULL LIST OF RATING ACTIONS
Fitch affirms the following ratings:
--Issuer Default Rating at 'BB';
--Secured bank facility at 'BB+/RR1';
--Senior unsecured notes at 'BB/RR4'.
The Rating Outlook is Stable.
Summary of Financial Statement Adjustments - Financial statement adjustments that depart materially from those contained in the published financial statements of the relevant rated entity or obligor are disclosed below:
--Historical and projected EBITDA is adjusted to add back non-cash stock based compensation. In 2015, Fitch added back $30 million in non-cash stock based compensation to its EBITDA calculation.
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
Dodd-Frank Rating Information Disclosure Form
https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1006125
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1006125
Endorsement Policy
https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31
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