NEW YORK--(BUSINESS WIRE)--Fitch Ratings has upgraded Community Health Systems' (Community) ratings, including the Issuer Default Rating (IDR) to 'B+' from 'B'. The Rating Outlook is Stable. The ratings apply to approximately $9.3 billion of debt at March 31, 2012. A full list of rating actions is provided below.
THE 'B+' IDR PRIMARILY REFLECTS
--Community's financial flexibility has improved in recent years. Debt-to-EBITDA dropped to around 5.0 times (x) at March 31, 2012 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 $454 million in the latest 12 months (LTM) ended March 31, 2012, and 2012-2013 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 and Fitch expects them to remain so throughout 2012. In the near term, Community's growth will be supported by its recent hospital acquisitions.
--Community's patient admission policies and associated billing practices are facing heightened regulatory scrutiny and there is ongoing uncertainty about any potential financial or operating 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 $1.9 billion in cumulative FCF and has applied about $300 million for debt reduction. Total debt-to-EBITDA has dropped to about 5.0x at March 31, 2012 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.
At March 31, 2012, debt-to-EBITDA was increased by about 0.2x versus the 2011 year end level of 4.8x, due to debt proceeds in the first quarter of 2012 (1Q'12) which were used in part to fund the company's recent acquisitions. At March 31, 2012, Fitch calculates debt leverage through the secured bank debt of 3.3x and 5.0x through the senior unsecured notes. The company's bank agreement requires total debt maintained below 5.5x EBITDA and interest coverage of at least 2.25x EBITDA. At March 31, 2012, the company had an adequate operating cushion under the covenants.
Fitch does not anticipate Community to apply cash to meaningful debt reduction during 2012. Any incremental drop in leverage is expected to be nominal and to depend upon growth in EBITDA. Maintenance of the 'B+' IDR will depend on total debt-to-EBITDA generally maintained at or below 5.0x.
RECENT DEBT REFINANCING IMPROVES LIQUIDITY PROFILE
A favorable debt maturity schedule and good liquidity support the credit profile. Near-term debt maturities include about $35 million and $75 million of annual required principal amortization on the bank term loans in 2012-2013, respectively. The company has recently made progress in extending its maturity profile. Over the past year it has moved a total of $3.75 billion of the $6 billion of bank term loans due 2014 to 2016 and 2017, through the issuance of a new $750 million term loan A due 2016 and two separate amend and extend agreements which pushed out $3 billion of the 2014 term loan B maturities to 2017.
The 2016 and 2017 term loan maturity dates are contingent upon the refinancing of the non-extended portion of term loan B due July 2014 and the senior notes due July 2015. Community refinanced $1.9 billion of the $2.8 billion 2015 notes with new notes due 2019 in 4Q'11 and 1Q'12. There are about $930 million of remaining notes due 2015 and the non-extended portion of term loan B maturing 2014 is currently about $2.2 billion.
Community's liquidity was provided by approximately $129 million of cash and marketable securities at March 31, 2012, availability on the company's $750 million bank revolver ($712.3 million available at March 31, 2012 reduced for outstanding letters of credit), and FCF of about $453 million for the LTM ended March 31, 2012. Community generates solid cash flow relative to its operating and reinvestment requirements. Fitch projects FCF sustained above $300 million annually. The lower level of forecasted FCF is primarily based on Fitch's expectation of higher capital expenditures and cash taxes.
Fitch expects that Community will continue to prioritize use of cash for hospital acquisitions. Community stepped up its acquisition activity in 2011, spending $415 million to complete four transactions during the year. The company states that its 2011 acquisitions represent about $400 million of annual revenue. Since the start of 2012, Community has completed three additional acquisitions, including two hospital acquisitions and an acquisition of outpatient diagnostic clinics. The two hospital acquisitions are expected to contribute $360 million of annual revenue. Combined, the company's 2011 and year-to-date 2012 hospital acquisitions represent about 6% of the company's 2010 revenues of $13 billion.
WEAK ORGANIC OPERATING TRENDS
Community's organic patient volume growth lagged the broader for-profit hospital provider industry in 2011. Across the Fitch-rated group of for-profit hospital providers, same-hospital admissions declined 1.6% on average in 2011 while same-hospital adjusted admissions (a measure that is adjusted for outpatient activity) grew by just 0.4%. Community's same hospital admissions were down 5.6%, and adjusted admissions down 0.7%. Community's organic operating trend did show some improvement in 1Q'12. The company's same hospital admissions declined 2.3% year-over-year, while adjusted admissions were up 2.5%. This is the company's first quarter of positive organic volume growth in eight consecutive quarters.
Despite its recently weak organic patient volume trend, Community 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 13.4% EBITDA margin in 2011 was only down about 18 basis points (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 in 2012, although the 1Q'12 levels showed some improvement. 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).
HEIGHTENED REGULATORY SCRUTINY
Community's patient admission policies and associated billing practices have recently been the subject of heightened regulatory scrutiny. There is ongoing uncertainty about the potential for financial liability with respect to past Medicare billing practices or a reduction in the company's revenues and EBITDA resulting from changes in admissions practice.
The regulatory issues will take some time to resolve and in the interim period, there is the concern that a reputational issue associated with the governmental inquires could negatively affect operations. However, this does not appear to be the case in recent periods. Organic patient volume trends improved somewhat in 1Q'12, the company is showing strong results in physician recruitment, and it has not been hindered in its acquisition activity.
GUIDELINES FOR FURTHER RATING ACTIONS
Maintenance of a 'B+' IDR for Community would be consistent with financial and credit metrics maintained at the current levels, including total debt-to-EBITDA at or below 5.0x and annual FCF generation above $300 million. Given the company's currently solid level of financial flexibility, Fitch thinks that downward pressure on the ratings is unlikely outside of event risk surrounding an acquisition or any potential financial liability stemming from the regulatory issues facing the company.
Community has demonstrated that it will consider large acquisitions, as evidenced by the $6.9 billion Triad Hospitals acquisition in 2007 and its December 2010 bid to acquire Tenet Healthcare Corp. Fitch expects though that in the near term Community will probably continue to focus its acquisition efforts on smaller transactions that can be primarily cash funded.
DEBT ISSUE RATINGS
Fitch has taken the following rating actions on Community:
--IDR upgraded to 'B+' from 'B';
--Senior secured credit facility upgraded to 'BB+/RR1' from 'BB/RR1';
--Senior unsecured notes affirmed at 'B', recovery rating revised to 'RR5' from '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 6.5x distressed enterprise value (EV) multiple and stresses 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.
The affirmation of the unsecured notes rating at 'B' despite the upgrade of the IDR is based on a lower estimated distressed EV multiple. In previous recovery analysis for Community, Fitch assigned a 7.0x multiple. The 6.5x multiple is based on recent acquisition multiples in the healthcare provider space as well as the recent trends in the public equity valuations of the for-profit hospital providers.
Fitch estimates Community's distressed enterprise valuation in restructuring to be approximately $8.3 billion. The 'BB+/RR1' rating for the bank facility reflects Fitch's expectations for 100% recovery under a bankruptcy scenario. The 'B/RR5' rating on the unsecured notes rating reflects Fitch's expectations for recovery in the 11%-31% 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);
--'For-Profit Hospital Quarterly Diagnosis: Fourth Quarter 2012' April 25, 2012;
--'For-Profit Hospital Insights: Electronic Health Record Incentive Payments' March 7, 2012;
--'2012 Outlook: U.S. Healthcare' (Dec. 7, 2011);
--'For-Profit Hospital Insights: Changes in Bad Debt Reporting Will Improve Disclosure' (July 26, 2011);
--'For-Profit Hospital Insights: A Review of Bad Debt Accounting Policies and Practices' (June 8, 2011).
Applicable Criteria and Related Research:
Corporate Rating Methodology
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=647229
For-Profit Hospital Quarterly Diagnosis: Fourth-Quarter 2011
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=676742
For-Profit Hospital Insights: Electronic Health Record Incentive Payments
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=673291
2012 Outlook: U.S. Healthcare -- Accelerating Regulatory and Fiscal Challenges
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=659178
For Profit Hospital Insights: Changes in Bad Debt Reporting Will Improve Disclosure
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=646892
For-Profit Hospital Insights
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=636170
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