NEW YORK--(BUSINESS WIRE)--Fitch Ratings has assigned a 'BB' rating to LifePoint Hospitals, Inc.'s (LifePoint) $400 million proposed senior unsecured notes. Proceeds of the notes will be used to partially retire the company's $575 million convertible subordinated notes maturing later this month. A complete list of ratings follows at the end of this release. The ratings apply to approximately $2.4 billion of debt at March 31, 2014. The Rating Outlook is Stable.
KEY RATING DRIVERS
--Pro forma for the $400 million notes issue and pay-down of the convertible subordinated notes maturity, LifePoint's pro forma leverage (total debt to EBITDA) of 4.0x EBITDA, is amongst the lowest in the for-profit hospital industry.
--Debt has recently trended higher as the result of funding of acquisitions and share repurchases, and Fitch expects the company to continue to deploy capital for these purposes in 2014.
--Liquidity is solid. Lower profitability resulting from the integration of recently acquired hospitals is expected to pressure the level of free cash flow (FCF; cash from operations less dividends and capital expenditures), but Fitch expects it to remain above $150 million annually.
--Organic growth in patient volume has been persistently weak across the for-profit hospital industry. However, LifePoint's recent hospital acquisitions in relatively faster growing markets will support growth for the company.
MORE AGGRESSIVE CAPITAL DEPLOYMENT DRIVING HIGHER LEVERAGE
At 4.2x total debt to EBITDA at March 31, 2013, LifePoint Hospital Inc.'s (LifePoint) leverage is amongst the lowest in the for-profit hospital industry, commensurate with the strong financial flexibility required for a 'BB' category rating. However, leverage is up substantially over the past year, and Fitch expects it to be maintained near 4.0x after pay-down of the $575 million convertible subordinated notes maturity.
Unless risk associated with higher leverage is offset by continued decent operating results and FCF generation, it will result in a downgrade of the ratings. Pro forma for the notes issuance and pay-down of the senior subordinated convertible notes, Fitch estimates gross debt leverage of 1.1x through the senior secured bank debt and 3.9x through the senior unsecured notes.
In addition to the upcoming notes maturity, the primary uses of cash in the first half of 2014 include several hospital acquisitions and share repurchases. Acquisitions have been a top use of cash for LifePoint, consuming 52% of cash from operations in 2012 and 2013 and 34% in the LTM ended March 31, 2014. The company closed one transaction so far 2014, requiring a $60 million cash commitment, and has announced several transactions expected to close later in the year.
In recent transactions, LifePoint has added inpatient acute care hospital assets in relatively faster growing markets, including markets in three new states - North Carolina, Michigan and Indiana. Fitch thinks this strategy achieves some important aims for LifePoint, including boosting relatively weak organic growth in the company's existing markets and reducing geographic concentration; 54% of 2013 revenue was generated in the company's five largest states.
With CFO trending around $350 million and run-rate FCF of around $170 million, based on the cost of its past acquisitions, Fitch estimates that LifePoint can fund two or three transactions with cash on hand annually. However, given the rapid pace of transactions and the recently larger cash commitments associated with some acquisitions, there is a risk that funding of the acquisition strategy could result in leverage sustained above the 4.0x level that is consistent with the 'BB' rating.
DECENT FINANCIAL FLEXIBILITY
At March 31, 2014, liquidity was provided by approximately $532 million of cash on hand, availability on the company's $350 million bank credit facility revolver ($330 million available), and FCF ($201 million for the latest 12 months [LTM] period, defined as cash from operations less dividends and capital expenditures).
The largest upcoming maturity is the $575 million senior subordinated convertible notes maturing May 2014. Fitch expects the company will pay down the maturity using cash on hand, including proceeds of the $400 million proposed notes. Subsequent to the convertible notes maturity, the next largest maturity does not occur until 2017. Fitch notes that LifePoint has ample capacity to issue additional debt on either of the secured or unsecured level. The bank agreement permits additional secured debt up to a senior secured leverage ratio of 3.5x with an $800 million carveout regardless of the ratio (there is a springing lien provision in the senior unsecured notes indenture which required these notes to become ratably secured when secured debt is greater than 3.0x EBITDA). A financial maintenance covenant requires total-debt-to-EBITDA maintained below 5.0x.
Fitch projects that LifePoint's FCF will contract by about $40 million in 2014 versus the March 31, 2014 LTM level of $201 million, to $160 million. This is because of lower profitability and higher capital expenditures later in the year. An expectation for a slight contraction in the EBITDA margin 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 operator in the for-profit hospital industry, with a sole-provider position in nearly all of its 60 markets, although the company 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 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 been consistent 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 exhibited a much stronger rebound in volume growth that has since reversed for most companies, with weak organic volume trends industry-wide in 2012 - 2013.
LifePoint and the company's peers have recently been successful in augmenting weak organic operating trends through acquisition of inpatient hospitals and other types of care delivery assets. Consolidation of the industry has been encouraged by the financial pressures on smaller operators related to payment reforms that are required by the Affordable Care Act (ACA), and capital requirements necessary to comply with other government mandates, such as the implementation of electronic health records.
AFFORDABLE CARE ACT A POSITIVE DRIVER IN 2014
LifePoint's Q1'14 operating results benefited from the early implementation of the health insurance expansion provisions of the ACA, including the mandate for individuals to purchase health insurance or face a financial penalty, and the expansion of Medicaid eligibility. Most of the benefit to LifePoint's results seems to have stemmed from a reduction in self-pay volumes as opposed to higher utilization of healthcare by newly insured individuals. This result is consistent with Fitch expectations of the influence of the ACA on the hospital industry.
Expansion of state Medicaid program is of particular importance to reduction in self-pay patients and the associated headwind of bad debt expense for hospital companies. Seven of the 20 states in which LifePoint operates hospitals expanded Medicaid programs on Jan. 1, 2014, including five of the eight states where the company has its largest revenue exposure. LifePoint estimates that about 80% of the uninsured population of the seven states opting in to Medicaid expansion qualifies for coverage under the new, more generous, income limitations. The company further reports that 35% of self-pay patient volumes are attributable to those same seven states.
A downgrade of the ratings could result from gross debt to EBITDA being maintained above 4.0x and FCF generation sustained below $150 million annually. The most likely driver of a negative rating action is debt funding of capital deployment, including acquisitions and share repurchases, contributing to leverage above 4.0x. In addition, difficultly 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 of the ratings is not expected in the next several years. It would require the company to commit to maintain leverage below 3.0x. Fitch does not believe LifePoint 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.
DEBT ISSUE RATINGS
Fitch currently rates LifePoint as follows:
--Issuer Default Rating 'BB';
--Secured bank facility 'BB+';
--Senior unsecured notes 'BB';
--Subordinated convertible notes 'BB-'.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Hospitals Credit Diagnosis' (April 10, 2014);
--'High-Yield Healthcare Checkup' (April 4, 2014);
--'2014 Outlook: U.S. Healthcare' (Nov. 25, 2013).
--'For Profit Hospital Insights: Fitch's Annual Review of Bad Debt Accounting Policies and Practices' (Oct. 24, 2013);
--'Margin Preservation Strategies: Different Angles (U.S. Hospitals and Health Insurers)' (Oct. 1, 2013);
--'The Affordable Care Act and Healthcare Providers: Assessing the Potential Impact' (May 1, 2013);
--'Corporate Rating Methodology' (Aug. 5, 2013).
Applicable Criteria and Related Research:
Hospitals Credit Diagnosis (Consolidation Supports Growth in a Weak Organic Operating Environment)
High-Yield Healthcare Checkup: Comprehensive Analysis of High-Yield U.S. Healthcare Companies
2014 Outlook: U.S. Healthcare -- Secular Challenges Require a Compelling Value Proposition
For Profit Hospital Insights: Changes in Bad Debt Reporting Will Improve Disclosure
Margin Preservation Strategies -- Different Angles (Credit Implications for U.S. Hospitals and Health Insurers)
The Affordable Care Act and Healthcare Providers (Assessing the Potential Impact)
Corporate Rating Methodology -- Effective 12 August 2011 to 8 August 2012