NEW YORK--(BUSINESS WIRE)--Fitch Ratings has upgraded its ratings for LifePoint Hospitals, Inc. (LifePoint) including the Issuer Default Rating (IDR), to 'BB' from 'BB-'. The Rating Outlook is revised to Stable from Positive. A complete list of ratings is provided at the end of this release. The ratings apply to approximately $1.7 billion of debt at March 31, 2011.
RATING RATIONALE:
--LifePoint has consistently demonstrated a solid level of financial flexibility. Total debt-to-EBITDA has trended close to 3.0 times (x) since 2007. While the debt balance has increased by about $150 million over that time, growth in EBITDA has offset the impact on leverage.
--LifePoint generated free cash flow (FCF) of about $205 million in 2010; the level of FCF generation has more than doubled since 2007 due to higher EBITDA, lower cash tax and interest expense. The company's 2011-2013 debt maturities are nominal.
--Organic operating trends in the for-profit hospital industry are weak and Fitch expects them to remain so throughout the rest of 2011. Fitch does not see a near-term catalyst for improvement in patient utilization trends barring an accelerated macro economic recovery.
--LifePoint's organic patient volume trends persistently lag the broader industry. Despite this issue, LifePoint is more profitable (based on EBITDA operating margins) than most of its peers and organic top-line growth has not lagged the industry. This is owing to strength in pricing trends and good management of controllable operating expenses, including labor and supplies.
--LifePoint is taking a measured approach to hospital acquisitions, using cash on hand to fund a series of small transactions. This strategy has recently been successful in augmenting tepid organic volume growth.
--Fitch expects the pipeline of potential acquisition targets will remain deep in the near term. LifePoint's preferred acquisition targets - stand-alone and small hospital systems - are experiencing financial pressure stemming from weak organic operating trends, and the implementation of certain elements of healthcare reform is encouraging industry consolidation.
SOLID FINANCIAL FLEXIBILITY:
LifePoint has consistently demonstrated a strong level of financial flexibility in recent years. Total debt-to-EBITDA of 3.1x at March 31, 2011 is up slightly from the prior year due to an increase in the debt balance, partly offset by growth in EBITDA. LifePoint issued $400 million in unsecured notes in the third quarter of 2010 (3Q'10), about half of the proceeds of which were used to refinance a portion of the bank facility term loan and half to fund general corporate purposes, including share repurchases.
LifePoint's ratings anticipate that debt-to-EBITDA will be maintained around 3.0x-3.5x. At March 31, 2011, debt-to-EBITDA equaled 0.8x through the senior secured bank debt, 1.6x through the senior unsecured notes and 3.1x through the senior subordinated convertible notes. While small incremental drops in leverage could result from growth in EBITDA, Fitch expects LifePoint to prioritize use of FCF for funding of hospital acquisitions as opposed to debt reduction.
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, although the $225 million senior subordinated convertible debentures due 2025 are puttable to the company in 2013. Pending refinancing of the $575 million senior subordinated convertible notes due 2014, maturity of the $443 million bank term loan will be extended to April 2015 from February 2014. At March 31, 2011, liquidity was provided by approximately $267 million of cash, availability on the company's $350 million bank credit facility revolver ($318.9 million available), and FCF ($216 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 $75 million in 2011 versus the 2010 level. This is mostly due to higher capital expenditure in the year. The company is constructing a $60 million replacement hospital in Winchester, KY for Clark Regional Medical Center, one of its 2010 acquisitions. LifePoint has adequate capacity under its bank facility financial maintenance covenants, which require total leverage of below 3.75x and interest coverage of above 3.5x. Based on its moderately positive 2011-2013 operating outlook for the company, Fitch believes the company will not have a problem maintaining compliance with its covenants.
INDUSTRY LAGGING PATIENT VOLUME TRENDS:
LifePoint operates 52 acute-care hospitals, primarily located in rural markets. In 49 of its 52 markets, LifePoint's facility is the sole acute care hospital provider in the market. Organic patient volume trends have been weak across the hospital industry since the trough of the 2008 recession. LifePoint's organic volume trend has been lagging the broader industry since before that time. Fitch believes this is due to a combination of factors, including digesting the $1.8 billion acquisition of Province Healthcare Company and some difficulties with community and physician relationships following the acquisition of Danville Regional Medical Center, both in 2005. More recently, LifePoint's markets may have performed less robustly due to unemployment rates trending higher than the national level.
LifePoint has taken steps to address its lagging organic volume growth, including ramping up physician recruitment and expanding services in medically underserved communities. There have been some signs of progress from these efforts. Most significantly, while LifePoint's patient volume growth continues to underperform the industry, it does appear to be narrowing the gap. Despite its operational issues, LifePoint's operating margins are higher than those of most of its peers, and organic top line growth has not lagged the industry. This is owing to strength in pricing trends and good management of controllable operating expenses, including labor and supplies.
In 2010, the for-profit hospital industry's same-hospital admissions declined 1.5% while same-hospital adjusted admissions (a measure adjusted for outpatient activity) grew by just 0.7%. During the year, LifePoint's same hospital admissions were down 2.2%, and adjusted admissions up 0.4%. Most companies provided 2011 guidance incorporating flat growth in same hospital adjusted admissions trends, including LifePoint, which has guided to organic growth in adjusted patient admissions of 0%-2% for 2011. This is despite easy comparisons against the weak trend in 2010 and is consistent with Fitch's expectation for 2011.
There is no clear catalyst for near-term improvement in organic volume trends barring an accelerated macroeconomic recovery. In fact, concerning trends indicating higher levels of structural unemployment, and growth in the consumer share of healthcare spending (such as through high deductible health plans), support an expectation of weak organic volume trends in the sector for some time to come. LifePoint's 1Q'11 same hospital admissions declined 1.2% versus the prior year period, while adjusted admissions were up 0.1%.
GROWTH THROUGH ACQUISITION STRATEGY:
After taking a hiatus in 2007-2008, LifePoint ramped up its hospital acquisition activity beginning in 2009. Fitch expects that the company will continue to deploy cash to fund hospital acquisitions. Based on its moderately positive operating and cash flow outlook for LifePoint, Fitch expects the company would be able to fund two or three acquisitions similar to the size of its 2009-2010 acquisitions out of internal cash resources annually. In early 2009 through 2010, LifePoint acquired about $300 million of annual revenue, which represented around 10% of the company's same hospital revenue base.
Fitch notes that the entire for-profit hospital industry is currently in acquisition mode due to attractive asset valuations and the need to deploy excess cash to create shareholder value given weak organic operating trends. LifePoint's relatively small size means that incremental, cash flow funded acquisitions can significantly move the needle on revenue growth. While it is possible that LifePoint could consider a larger transaction, its recent activity has been measured. The largest acquisition in the past 18 months, of High Point Regional Health System, cost the company $145 million. The integration of the company's recently acquired hospitals seems to be progressing smoothly, without the type of problems experienced with physician and community relations experienced after the company's 2005 acquisition of Danville Regional Medical Center.
GUIDELINES FOR FURTHER RATING ACTIONS:
Maintenance of a 'BB' IDR for LifePoint will require debt-to-EBITDA maintained at or below 3.5x, coupled with a sustained solid liquidity profile, with FCF sufficient to fund the company's growth through acquisition strategy. LifePoint's debt leverage is amongst the lowest of the publicly traded acute care hospital companies; the company has a publicly stated leverage target of 3.0-4.0x. A leveraging acquisition or deterioration in financial flexibility resulting from difficulties in integration of its recent acquisitions would be the most likely causes of a negative rating action for LifePoint. Also of concern is the potential for a sustained weak organic growth trend for the hospital industry, which could erode profitability and financial flexibility over time.
DEBT ISSUE RATINGS:
Fitch upgrades LifePoint's ratings as follows:
--IDR to 'BB' from 'BB-';
--Secured bank facility to 'BB+' from 'BB-';
--Senior unsecured notes to 'BB' from 'B+';
--Subordinated convertible notes to 'BB-' from 'B'.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 16, 2010).
Applicable Criteria and Related Research:
Corporate Rating Methodology
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=546646
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