NEW YORK--(BUSINESS WIRE)--Fitch Ratings has assigned a 'BB/RR1' rating to Tenet Healthcare Corporation's (Tenet) $900 million senior secured notes due 2020 and a 'B-/RR5' rating to Tenet's $1.9 billion senior unsecured notes due 2023. Proceeds will be used to fund the planned acquisitions of a 50.1% ownership interest in United Surgical Partners International (USPI), and the purchase of Aspen Healthcare, as well as to refinance certain of Tenet's and USPI's outstanding debt.
KEY RATING DRIVERS
--Tenet is among the largest for-profit operators of acute care hospitals in the U.S. and, through the planned acquisition of a majority ownership interest in USPI, will become the largest operator of ambulatory surgery and imaging centers. Scale is increasingly important as U.S. healthcare providers look to drive efficiencies that offset the effects of an overall constrained reimbursement environment.
--Debt funding of the USPI transaction will prolong the de-leveraging horizon Fitch had considered following the 2013 acquisition of Vanguard Health Systems, Inc. (Vanguard). Opportunities to repay debt are limited over the ratings horizon given the absence of prepayable bank loans in Tenet's capital structure, although $750 million of 8% senior notes that are callable at a premium in August 2015 represent debt that could be paid down.
--Fitch believes that the structure of the USPI transaction is initially unfavorable to Tenet's balance sheet. Funding will occur at the parent company level rather than at the joint venture level, which will dilute the free cash flow (FCF) benefit to Tenet.
--The USPI deal is strategically compelling. It will improve Tenet's payor mix and markedly boost the company's position in more profitable outpatient services. The USPI business will also provide Tenet with an offset to Fitch's expectation for flat to declining inpatient hospital volumes due to a secular shift toward lower-cost care delivery settings.
--Fitch expects improving underlying business fundamentals, particularly at legacy Vanguard, to combine with lower uncompensated care from the health insurance expansion components of the Affordable Care Act (ACA) to drive improving FCF generation for Tenet in 2015-2016.
--Hospital industry management teams are contending with a very dynamic operating environment due to the implementation of the ACA, the evolution of payment schemes, and other regulatory reforms influencing organic operating trends. Tenet is now adding the complex partnership-driven business model of USPI on top of the ongoing integration of Vanguard, which was Tenet's largest acquisition in recent history.
KEY ASSUMPTIONS
Fitch's key assumptions within the rating case for Tenet include:
--Top-line organic growth of 3%-4% annually, driven by commercial pricing increases coupled with sustained positive growth in patient volumes, although some decline is expected versus the very strong volume results posted across the hospital industry in the last two quarters;
--Operating EBITDA margins sustained above 12% and slightly expanding in 2015-2017;
--No substantial debt repayment in 2015-2017, except the portion of the current issuances used to refinance debt of USPI and Tenet;
--Tenet will spend $1.5 billion to acquire the remaining 49.9% interest in the USPI joint venture through 2019;
--Capital expenditures of $1 billion or more in 2015 and 2016.
RATING SENSITIVITIES
Maintenance of Tenet Healthcare's 'B' Issuer Default Rating (IDR) considers gross debt-to-EBITDA trending toward 5.5x over the next one to two years. Pro forma for the USPI transaction, Fitch calculates leverage of 6.4x. EBITDA growth is expected to be the primary source of deleveraging since Tenet is not expected to have a material amount of prepayable debt after the USPI transaction. If Tenet uses debt to fund the planned acquisition of the other 49.9% of the USPI JV, as opposed to equity or cash on hand, it could drive a downgrade of the ratings.
A positive rating action is unlikely over the next one to two years because of Tenet's weak FCF generation and high leverage. Furthermore, the 'B' IDR incorporates the expectation for generally improving operations in the hospital industry as a result of the ACA and economic improvement in the near term.
FULL LIST OF RATING ACTIONS
Fitch rates Tenet as follows:
--IDR 'B';
--Senior secured ABL facility 'BB/RR1';
--Senior secured notes 'BB/RR1';
--Senior unsecured notes 'B-/RR5'.
The Rating Outlook is Negative.
Additional information is available on www.fitchratings.com
Applicable Criteria
Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 28 May 2014)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749393
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