News Column

Fitch Affirms LifePoint Hospitals Inc.'s IDR at 'BB'; Outlook Stable

June 11, 2014

NEW YORK--(BUSINESS WIRE)-- Fitch Ratings has affirmed LifePoint Hospitals, Inc.'s (LifePoint) ratings, including the 'BB' Issuer Default Rating (IDR). 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 debt financing activity in Q2'14, including a $400 million unsecured notes issue and pay-down of a $575 million convertible subordinated notes maturity, LifePoint's pro forma June 30, 2014 leverage (total debt to EBITDA) of 4.0x EBITDA is amongst the lowest in the for-profit hospital industry.

--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 March 31, 2014 LTM level (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

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 March 31, 2013. Higher leverage at the end of Q1'14 was partly the result of pre-funding debt maturities. The company paid off the $575 million convertible subordinate notes in May and leverage dropped to 4.0x. Higher leverage is also the result of a recently more aggressive approach to acquisitions and share repurchases, including three pending but not yet closed transactions. Incremental EBITDA associated with these transactions will result in lower leverage in the second half of 2014. In general, Fitch thinks the company can maintain this recently more aggressive approach to the capital deployment strategy while holding leverage at or below 4.0x.

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 March 31, 2014. The company closed one transaction so far in 2014, requiring a $60 million cash commitment, and has announced three pending transactions expected to close later this year.

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 - North Carolina, Michigan and Indiana. Fitch thinks this strategy achieves some important aims for LifePoint, including boosting relatively week 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.

LifePoint's CFO and FCF trend around $400 million and $170 million annually, so based on the cost of its past acquisitions, Fitch estimates that the company can fund two or three transactions with cash on hand annually. 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.

GOOD 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 LTM period). The recent maturity of the $575 million senior subordinate notes in May 2014 was paid down with cash on hand and proceeds from the newly issued $400 million senior unsecured notes. The next large maturity does not occur until 2017 at final maturity of the bank term loans.

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. At March 31, 2014, Fitch calculates secured debt leverage of 1.2x and total debt leverage of 4.2x.

Fitch projects that LifePoint's FCF will contract by about $40 million versus the March 31, 2014 LTM level of $201 million, to $160 million at year end 2014. This is because of anticipated higher capital expenditures due to the timing of some projects concentrated later in the year.

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 Medicaid eligibility. Most of the benefit to LifePoint resulted from a reduction in uninsured patient 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 volumes of uninsured patients and the associated headwind of bad debt expense for hospital companies. Seven of the 20 states in which LifePoint operates 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. Michigan, a state where LifePoint has recently been expanding its footprint through acquisitions, opted into Medicaid expansion on April 1, 2014. The positive implications of this for this company are muted however, since the LifePoint hospitals are located in markets with relatively low levels of uncompensated care.

RATING SENSITIVITIES

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, difficulty 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 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 $350 million senior secured revolver, a $433 million term loan A and a $223 million term loan B. The company also has $400 million 6.625% senior unsecured notes and $1.1 billion 5.5% senior unsecured notes currently outstanding. The $1.1 billion of unsecured notes are inclusive of a $400 million add-on issue in May 2014, proceeds of which were used repay the maturing $575 million 3.5% senior subordinated notes, eliminating subordinated debt from the capital structure.

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'.

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' (May 28, 2014).

Applicable Criteria and Related Research:

Hospitals Credit Diagnosis (Consolidation Supports Growth in a Weak Organic Operating Environment)

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=745816

High-Yield Healthcare Checkup: Comprehensive Analysis of High-Yield U.S. Healthcare Companies

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=736356

2014 Outlook: U.S. Healthcare ??? Secular Challenges Require a Compelling Value Proposition

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=724141

For Profit Hospital Insights: Changes in Bad Debt Reporting Will Improve Disclosure

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=646892

Margin Preservation Strategies ??? Different Angles (Credit Implications for U.S. Hospitals and Health Insurers)

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=718975

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=834156

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.



Fitch Ratings

Primary Analyst

Megan Neuburger

Senior Director

+1-212-908-0501

Fitch Ratings, Inc.

33 Whitehall Street

New York, NY 10004

or

Secondary Analyst

Jacob Bostwick

Director

+1-312-368-3169

or

Committee Chairperson

Michael Weaver

Managing Director

+1-312-368-3156

or

Media Relations

Brian Bertsch, New York, +1-212-908-0549

brian.bertsch@fitchratings.com

Source: Fitch Ratings


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