NEW YORK--(BUSINESS WIRE)--Fitch Ratings has assigned a 'B/RR4' rating to Community Health Systems (Community) $1 billion proposed senior unsecured notes due 2019. Proceeds will refinance existing debt. Community's Issuer Default Rating (IDR) is currently 'B'. The Rating Outlook is Positive. The ratings apply to approximately $8.8 billion of debt at Sept. 30, 2011. A full ratings list appears below.
THE 'B' IDR PRIMARILY REFLECTS
--Community's financial flexibility has improved in recent years. Debt-to-EBITDA dropped to around 4.9 times (x) at Sept. 30, 2011 from 5.8x in 2008, the year immediately following the $6.9 billion acquisition of Triad Hospitals.
--Liquidity is solid. The company generated free cash flow (FCF; cash from operations less dividends and capital expenditures) of about $292 million in the latest twelve months (LTM) ended Sept. 30, 2011, and 2011 - 2013 debt maturities are small. Fitch expects Community to continue to prioritize hospital acquisitions as a use of cash.
--Organic operating trends in the for-profit hospital industry are weak. Fitch expects them to remain so throughout the rest of 2011 and into 2012.
--Community's patient admission policies and associated billing practices are facing heightened regulatory scrutiny. This will constrain Community's IDR to 'B' while there is ongoing uncertainty about any potential financial impact.
SOLID FINANCIAL FLEXIBILITY
Community's debt leverage has declined since the approximately $6.9 billion debt funded acquisition of Triad Hospitals in 2007. Since the acquisition, Community has generated about $1.6 billion in cumulative FCF and has applied about $300 million for debt reduction. Total debt-to-EBITDA has dropped to 4.9x at Sept. 30, 2011 versus around 5.8x post the acquisition. The reduction in leverage is about 50% attributable to a lower outstanding debt balance and 50% to growth in EBITDA.
Fitch does not anticipate Community to apply cash to further meaningful debt reduction beyond about $60 million in annual required amortization of its bank term loan in 2012 - 2013. Any incremental drop in leverage is expected to be nominal and to depend upon growth in EBITDA. Fitch expects Community to continue to prioritize use of cash to fund hospital acquisitions.
The company has not used debt financing to fund hospital acquisitions since Triad, instead using internal cash resources to fund a series of small acquisitions in recent years. The company's late 2010 bid to acquire Tenet Healthcare Corp. indicates that it is willing to undertake a large, leveraging transaction. However, Fitch expects Community's acquisition activity will probably focus on smaller, cash funded transactions in the near-term.
ADEQUATE LIQUIDITY
A favorable debt maturity schedule and good liquidity also support the credit profile. Community has no meaningful debt maturities until 2014 other than its undrawn credit revolver that expires in 2013. The company amended its bank agreement in Q4'10, extending maturity of a $1.5 billion portion of the $6 billion term loan to January 2017 from July 2014. The extension is contingent upon the refinancing of the company's $2.8 billion senior notes due July 2015. The company plans to use the proceeds of the $1 billion note offering to refinance a portion of the 2015 maturity.
Liquidity is provided by approximately $266 million of cash and marketable securities at Sept. 30, 2011, availability on the company's $750 million senior secured revolver ($700 million available at Sept. 30, 2011 reduced for outstanding letters of credit), and FCF ($292 million for the LTM ended Sept. 30, 2011).
The company generated about $500 million of FCF in 2009 and 2010. Community continues to generate solid cash flow relative to its operating and reinvestment requirements. However, due to negative working capital shifts and higher capital expenditures, FCF has trended lower. Fitch projects FCF sustained above $200 million annually despite a persistently weak operating environment.
WEAK ORGANIC OPERATING TRENDS
Community's organic patient volume growth has lagged the broader for-profit hospital provider industry over the past couple of years. Community's Q3'11 operating trend continued this pattern with same hospital admissions down 7% and same hospital admissions adjusted for outpatient activity down 1.1%. However, the company has not lagged its peers in top-line and EBITDA growth. Strong pricing and an active hospital acquisition strategy have supported revenue and EBITDA growth. Community has managed to achieve consistent incremental growth in EBITDA in recent periods despite the margin impacts of integrating less profitable acquired hospitals. The 13.3% EBITDA margin in the LTM period ended Sept. 30, 2011 was down about 25 bps from the 2010 level.
Since there is no apparent catalyst for near-term improvement in organic patient volumes, Fitch thinks Community's volume trends will remain weak heading into 2012. Trends that indicate higher levels of structural unemployment and growth in the consumer share of healthcare spending support an expectation of weak organic volume trends in the sector for some time to come. Continued strength in pricing will be critical to maintenance of profitability. There some concerning headwinds to the pricing outlook, particularly in government reimbursement rates (Medicare and Medicaid payors).
The hospital industry is absorbing scheduled reductions in Medicare reimbursement as required by the implementation of healthcare reform. Although these reductions are nominal, Medicare does make up about 30% of hospitals' revenues, on average, so even stagnant growth in Medicare reimbursement is a significant headwind. In addition, companies are currently absorbing cuts in state Medicaid reimbursement rates. Most of these took affect July 1 and will continue to affect the industry in 2012. Fitch notes however, that Community's good geographic diversification, with 130 hospitals located across 29 states, limits its exposure to Medicaid cuts in any one state.
HEIGHTENED REGULATORY SCRUTINY
Since early 2011 Community's patient admission policies and associated billing practices have been the subject of heightened regulatory scrutiny. This could constrain Community's IDR to 'B' while there is ongoing uncertainty about the potential for financial liability with respect to past billing practices or a reduction in the company's revenues and EBITDA resulting from changes in admissions practices.
These regulatory issues will take some time to resolve. In the interim period, Fitch believes there is the potential that a reputational issue associated with the governmental inquires could negatively affect operations. A persistent deterioration in the operating trend that indicates that the company is losing patient market share, having difficulty recruiting or retaining physicians, or is seeing diminished acquisition opportunities will be cause for concern.
GUIDELINES FOR FURTHER RATING ACTIONS
An upgrade to a 'B+' IDR for Community would be consistent with financial and credit metrics maintained at or slightly better than the current levels, coupled with enhanced visibility regarding regulatory scrutiny of the company's patient admissions and billing practices and any associated financial liability. Given the company's currently solid level of financial flexibility relative to the 'B' IDR, Fitch thinks that downward pressure on the ratings is unlikely outside of event risk surrounding an acquisition.
Community has demonstrated that it will consider large transactions, as evidenced by the $6.9 billion Triad Hospitals acquisition in 2007 and its recent bid to acquire Tenet. Fitch expects though that in the near-term Community will probably continue to focus its acquisition efforts on smaller transactions that can be cash funded.
DEBT ISSUE RATINGS
Fitch currently rates Community as follows:
--IDR 'B';
--Senior secured credit facility 'BB/RR1';
--Senior unsecured notes 'B/RR4'.
The recovery ratings (RR) reflect Fitch's expectation that the enterprise value of Community will be maximized in a restructuring scenario (going concern), rather than a liquidation. Fitch uses a 7.0x distressed enterprise value multiple reflecting the low end of recent acquisition multiples within the healthcare space. Fitch stresses Sept. 30, 2011 LTM EBITDA by 30%, considering post restructuring estimates for interest and rent expense and maintenance level capital expenditure as well as debt financial maintenance covenant requirements.
Fitch estimates the adjusted distressed enterprise valuation in restructuring to be approximately $8.8 billion. The 'BB/RR1' rating for the bank facility reflects Fitch's expectations for 100% recovery under a bankruptcy scenario. The 'B/RR4' rating on the unsecured notes rating reflects Fitch's expectations for recovery in the 31% - 51% range.
Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 12, 2011).
Applicable Criteria and Related Research:
Corporate Rating Methodology
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=647229
ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE.