NEW YORK--(BUSINESS WIRE)-- Fitch Ratings has assigned a 'B+' rating to LifePoint Hospitals Inc.'s (LifePoint) $400 million proposed senior unsecured notes due 2020.
In addition, Fitch has affirmed LifePoint's ratings as follows:
--Issuer Default Rating (IDR) at 'BB-';
--Secured bank facility at 'BB-';
--Senior subordinated convertible notes and debentures at 'B'.
The Rating Outlook is Positive. The ratings apply to approximately $1.5 billion in debt outstanding as of June 30, 2010.
Fitch expects LifePoint to apply proceeds of the $400 million senior notes issue as follows:
--$250 million to repay the 2011 and 2012 maturities of the secured bank credit facility term loan B;
--$150 million for general corporate purposes, including share repurchases.
In June 2010, Fitch affirmed LifePoint's IDR at 'BB-' and revised the Outlook to Positive from Stable. The company's ratings and Positive Outlook reflect:
--Sustained positive momentum in LifePoint's credit metrics, which have improved to levels more consistent with a 'BB' IDR. Debt-to-EBITDA equaled 2.9 times (x) at June 30, 2010; Fitch estimates leverage will increase by about 0.3x pro forma for the proposed senior notes issue to 3.2x.
--The company's healthy liquidity profile and better than industry average profitability.
--Strong organic revenue growth trends reflecting LifePoint's sole provider status in the majority of markets in which it operates hospitals.
Risks to the credit profile include LifePoint's weak, albeit improving, organic patient volume trends, which have contributed to declining profitability (as measured by EBITDA operating margins) from 2007-2009, and the company's recently more aggressive cash deployment policy, particularly as it pertains to hospital acquisitions and share repurchases.
An upgrade of the ratings over the next 12-18 months would be supported by LifePoint continuing to make progress in addressing the operating challenges which are contributing to its weak organic patient volume trends. Recent signals that management's operational initiatives are producing results include higher levels of physician recruiting (the company met its goal to add a net 5% to its physician rolls in 2008 and 2009), improved quality scores, and patient volume growth in targeted service lines. After lagging broader industry averages consistently since 2006, the company's organic volume growth (as measured by same hospital adjusted admissions) outpaced the broader industry in the first quarter of 2010 (1Q'10), and this positive trend persisted in 2Q'10.
LifePoint's credit profile is also supported by a favorable debt maturity schedule and adequate liquidity. However, Fitch had previously noted that the company would not likely be able to fund the 2011 term loan B amortization organically, so the pending refinancing of the maturity through the senior notes issue removes some risk from the company's liquidity outlook. Pro forma for the refinancing of the 2011-2012 term loan B maturities, there are no debt maturities in the capital structure until 2014, when the $575 million convertible subordinated notes and the $444 million remaining portion of the term loan B mature (maturity of term loan B will be extended to 2015 as long as the convertible notes are refinanced prior to Feb. 2014), although the $225 million convertible debentures due 2025 are puttable to the company in 2013.
Liquidity at June 30, 2010 was provided by cash on hand ($199.7 million), availability on the company's $350 million senior secured revolver expiring December 2012 ($318.8 million available reduced for outstanding LOCs), and free cash flow ($206 million for the LTM period). The company's level of FCF generation has been fairly steady since the beginning of 2008, and it improved slightly in 2009 to $183 million from $176 million; Fitch expects FCF in 2010 to trend about in-line with that level. LifePoint has adequate operating cushion under its credit facility financial maintenance covenants; as of the June 30, 2010 test date LTM EBITDA would have to decline by about 27% to trip the 4.0x leverage covenant.
Fitch expects LifePoint's June 30, 2010 cash balance to be impacted by funding of the Sumner Regional Medical Center acquisition, which closed in 3Q'10; LifePoint used $142 million of cash on hand to fund the acquisition. After taking a hiatus in 2007-2008, LifePoint ramped up its hospital acquisition activity beginning in 2009, and Fitch expects that LifePoint 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 1-2 acquisitions of a similar size and scope as Sumner out of internal cash resources annually.
POTENTIAL RATING TRIGGERS:
A one-notch upgrade of the IDR to 'BB' would be consistent with debt-to-EBITDA sustained between 3.0x and 3.5x over the next 12-18 months. Fitch expects LifePoint to continue to deploy cash for hospital acquisitions and share repurchases. While LifePoint's recently more aggressive cash deployment strategy is not necessarily inconsistent with a 'BB' IDR, if the company were to pursue larger, leveraging transactions, it would likely result in credit metrics sustained at a level more consistent with a 'BB-' IDR.
DEBT SECURITIES RATINGS:
The proposed senior notes represent a new security in LifePoint's capital structure. The proportion of secured debt in the capital structure will be reduced through the refinancing of a portion of the bank facility term loan B. However, at around 27% pro forma for the refinancing, the level of secured debt in the capital structure will remain large enough to prejudice recovery for lower classes of debt in a liquidation or restructuring, supporting a 'B+' rating on the senior notes, one-notch below the 'BB-' secured debt rating. Pro forma for the transaction, Fitch estimates that based on LTM June 30, 2010 EBITDA, leverage will equal 0.9x through the bank debt, 1.7x through the senior debt and 3.2x through the subordinated debt.
Fitch uses a bespoke analysis of recovery and assigns explicit Recovery Ratings for all issuers with IDRs of 'B+' and below. For issuers with IDRs above 'B+', Fitch incorporates broad consideration of relative recoveries to notch debt from the IDR and as credit quality improves debt issue ratings increasingly reflect average historical rates of recovery across all sectors. Other considerations include quality of secured debt collateral, total leverage and the proportion of secured, unsecured and subordinate debt. In this context, an upgrade of LifePoint's IDR to 'BB' would likely trigger a two-notch upgrade of the senior notes rating, to 'BB', on par with the IDR.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' Aug. 16, 2010;
--'Liquidity Considerations for Corporate Issuers' June 7, 2007;
--'Fitch's For-Profit Hospital Industry Quarterly Diagnosis' Sept. 14, 2010;
--'Healthcare Stats Quarterly' Sept. 9, 2010;
--'Healthcare Reform Update: Early Results' May 12, 2010.
Applicable Criteria and Related Research:
Corporate Rating Methodology
Liquidity Considerations for Corporate Issuers
Fitch's For-Profit Hospital Industry Quarterly Diagnosis -- Second-Quarter 2010
Healthcare Stats Quarterly -- Second-Quarter 2010
Healthcare Reform Update: Early Results
Megan Neuburger, +1-212-908-0501
One State Street Plaza
New York, NY 10004
Bob Kirby, CFA, +1-312-368-3147
Michael Weaver, +1-312-368-3156
Cindy Stoller, +1-212-908-0526 (New York)
KEYWORDS: United States North America New York
INDUSTRY KEYWORDS: Health Hospitals