|[January 31, 2013]
Fitch Rates LifePoint Hospitals' Proposed Term Loan B 'BB+'
NEW YORK --(Business Wire)--
Fitch Ratings has assigned a 'BB+' rating to LifePoint Hospitals, Inc.'s
(LifePoint) proposed $225 million bank term loan. A complete list of
ratings is provided at the end of this release. The ratings apply to
approximately $1.7 billion of debt at Sept. 30, 2012.
Proceeds of the new term loan are expected to be used to refinance the
$225 million 3.25% convertible senior subordinated debentures due 2025,
which are puttable to the company in February 2013. The proposed bank
term loan is permitted based on the terms of the company's credit
agreement, under which an accordion feature permits additional secured
debt subject to a leverage ratio condition.
--At 3.3x EBITDA at Sept. 30, 2012, LifePoint's gross debt leverage is
amongst the lowest in the for-profit hospital industry.
--Fitch expects debt could trend higher during 2013 as the result of
funding acquisitions and a higher level of capital expenditures, but to
remain consistent with the company's publicly stated leverage target of
--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), Fitch expects it to
remain above $150 million annually.
--Organic operating trends in the for-profit hospital industry are
presently weak, but Fitch expects the sector to benefit from the
implementation of the Affordable Care Act (ACA) starting in 2014.
LifePoint's recent hospital acquisitions are supporting growth for the
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. Pro forma for the proposed bank debt and pay-down of
the convertible debentures, debt-to-EBITDA will equal 1.4x through the
senior secured bank debt, 2.1x through the senior unsecured notes, and
3.3x through the senior subordinated convertible notes.
Hospital acquisitions have recently been a top use of cash for
LifePoint, consuming 50%, 30%, and 71% of CFO in 2010, 2011 and the LTM
ended Sept. 30, 2012, respectively. Fitch estimates that the company's
recent acquisitions will contribute about $240 million of revenue in
2012, or about 6.7% of the company's 2011 revenue before bad debt
expense of $3.5 billion. In recent years, LifePoint has primarily used
cash on hand to fund a series of small acquisitions, focusing on
inpatient acute care hospital assets. With CFO trending around $350
million and capital expenditures around $225 million, Fitch estimates
that LifePoint can fund two or three transactions with cash on hand
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
of hospitals in its preferred markets. However, Fitch does not believe
that the company has a financial incentive to manage its balance sheet
with debt below 3.0x EBITDA and expects leverage could trend higher in
2013 due to the funding of hospital acquisitions and share repurchases.
GOOD FINANCIAL FLEXIBILITY
A favorable debt maturity schedule and adequate liquidity also support
LifePoint's credit profile. There are no debt maturities in the capital
structure until 2014 when the $575 million senior subordinated
convertible notes mature. At Sept. 30, 2012, liquidity was provided by
approximately $98 million of cash, availability on the company's $350
million bank credit facility revolver ($280 million available), and FCF
($121 million for the latest 12 months [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 cntraction in the EBITDA margin in 2012 is primarily because of
the integration of less profitable acquired hospitals.
RURAL MARKET RECOVERY LAGGING BROADER INDUSTRY
LifePoint is the only pure-play non-urban hospital operator in the
industry, with a sole-provider position in 52 of its 56 markets,
although it has gained exposure in larger rural and small suburban
markets through some of its recent acquisitions. Having sole-provider
status in the vast majority of its markets confers certain benefits on
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 has recently lagged the
broader for-profit hospital industry, the company's results have not
been inconsistent with the experience of other rural and suburban market
hospital operators. 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.
LifePoint's management has attempted to address lagging volumes by
focusing physician recruitment on fast-growing specialty areas and
ramping up its outpatient services. This strategy appears to be having
some effect since the company's organic volume growth improved slightly
in the third quarter of 2012.
Fitch notes that LifePoint's same-hospital net revenue growth of 1.3% in
the third quarter of 2012 slowed relative to recent periods, primarily
because of a weak trend in pricing. Same-hospital net revenue per
adjusted admission was up only 2.9% year over year. This is concerning
since strong trends in pricing have been supporting top-line growth for
non-urban hospital providers in light of weak volume growth for the past
HEALTHCARE REFORM POSITIVE DRIVER IN 2014
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. These elements are currently expected to take effect in
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.
WHAT COULD TRIGGER A RATING ACTION:
LifePoint's current financial and credit metrics provide decent headroom
within the 'BB' rating category. However, a positive rating action is
unlikely in the near term unless Fitch believes the company will
maintain its gross debt level at or below 3.0x EBITDA.
A downgrade could result from gross debt to EBITDA being maintained
above 4.0x and FCF generation remaining below $150 million annually.
Drivers of higher leverage and lower cash generation could include
leveraging acquisitions, difficulties in integrating recent
acquisitions, and a persistently weak organic operating trend in the
for-profit hospital sector.
DEBT ISSUE RATINGS
Fitch currently rates LifePoint as follows:
--Secured bank facility 'BB+';
--Senior unsecured notes 'BB';
--Subordinated convertible notes '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:
--'High-Yield Healthcare Checkup' (Jan. 16, 2013);
--'Hospitals Credit Diagnosis' (Sept. 18, 2012);
--'Corporate Rating Methodology' (Aug. 8, 2012);
--'For-Profit Hospital Insights: Annual Review of Bad Debt Accounting
Policies and Practices' (June 21, 2012);
--'For-Profit Hospital Insights: Electronic Health Record Incentive
Payments' (March 7, 2012).
Applicable Criteria and Related Research:
High-Yield Healthcare Checkup: Comprehensive Analysis of High-Yield U.S.
Healthcare Companies -- Amended
Hospitals Credit Diagnosis: Operating Trends Remain Weak but Solid
Liquidity Supports Credit Profiles
Corporate Rating Methodology
For-Profit Hospital Insights: Fitch's Annual Review of Bad Debt
Accounting Policies and Practices
For-Profit Hospital Insights: Electronic Health Record Incentive Payments
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DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING
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