KEY RATING DRIVERS
--Pro forma for debt financing activity in Q2'14, including a
--Debt has trended higher since the end of 2013 as the result of funding of acquisitions and share repurchases, and Fitch expects the company to continue to deploy capital for these purposes throughout 2014.
--Liquidity is solid. Lower profitability resulting from the integration of recently acquired hospitals and higher capital expenditures are expected to pressure the level of free cash flow versus the
--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
While debt leverage remains low relative to peer companies, it has recently increased and is up by nearly a full turn of EBITDA versus the 3.2x level at
In addition to the subordinate 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
Risk associated with LifePoint's higher debt leverage is offset by continued decent operating results and FCF generation, partly reflective of the benefit of the recent acquisitions on the company's business profile. LifePoint has added inpatient acute care hospital assets in relatively faster growing markets, including markets in three new states -
LifePoint's CFO and FCF trend around
GOOD FINANCIAL FLEXIBILITY
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
Fitch projects that LifePoint's FCF will contract by about
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 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. Persistently weak organic volume trends across the industry began to show signs of improvement in the second half of 2011, but hospitals 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 - Q1'14.
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 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
Expansion of state
A downgrade of the ratings could result from gross debt to EBITDA being maintained above 4.0x and FCF generation sustained below
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 this lower level, and it is inconsistent with the company's recently more aggressive stance toward capital deployment.
Fitch affirms LifePoint's ratings as follows:
--Issuer Default Rating at 'BB';
--Secured bank facility at 'BB+';
--Senior unsecured notes at 'BB'.
LifePoint's debt includes a senior secured bank credit facility consisting of a
The bank debt and unsecured notes rank equally with respect to priority of payments, and security for the bank debt is limited to equity in the company's operating subsidiaries. Despite the relatively weak security package, Fitch rates the bank debt 'BB+', one notch above the senior unsecured notes rating, due to the more favorable recovery prospects that would be afforded to the bank lenders in a workout scenario.
Additional information is available at 'www.fitchratings.com'.
--'Hospitals Credit Diagnosis' (
--'High-Yield Healthcare Checkup' (
--'For Profit Hospital Insights: Fitch's Annual Review of Bad Debt Accounting Policies and Practices' (
--'Margin Preservation Strategies: Different Angles (U.S. Hospitals and Health Insurers)' (
--'The Affordable Care Act and Healthcare Providers: Assessing the Potential Impact' (
--'Corporate Rating Methodology' (
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
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)
Source: Fitch Ratings
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