Reuters logo
Fitch Assigns Ratings to Tenet's Refinancing Notes
June 5, 2017 / 3:37 PM / 4 months ago

Fitch Assigns Ratings to Tenet's Refinancing Notes

(The following statement was released by the rating agency) NEW YORK, June 05 (Fitch) Fitch Ratings has assigned a 'BB-/RR2' rating to Tenet Healthcare Corporation's (Tenet) $1.9 billion senior secured first-lien notes, and a 'B-/RR5' rating to each of Tenet's $1.4 billion senior secured second-lien notes and $500 million senior unsecured notes issues. Proceeds will be used to refinance existing debt and to pay related fees and expenses. The Rating Outlook is Stable. The ratings apply to $15.5 billion of debt outstanding at March 31, 2017. A full list of ratings follows at the end of this release. KEY RATING DRIVERS Tenet's 'B' Issuer Default Rating reflects: Favorable Operating Profile: Tenet is among the largest for-profit operators of acute care hospitals in the U.S., particularly following the acquisition of a majority interest in United Surgical Partners International (USPI) in 2015, a leading operator of ambulatory surgery and imaging centers. The USPI transaction improved Tenet's payor mix and boosted its position in more profitable outpatient services. USPI also provides an offset to Fitch's expectation for flat to declining inpatient hospital volumes due to a secular shift toward lower-cost care. Lingering High Leverage: Debt funding of the USPI transaction prolonged the deleveraging horizon Fitch considered following Tenet's 2013 acquisition of Vanguard Health Systems, Inc. Deleveraging has been slow because it relies primarily on EBITDA growth. Tenet's weak free-cash-flow (FCF) has limited the company's ability to repay debt; at March 31, 2017 leverage was 7.3x. FCF Persistently Weak: Improved profitability and lower cash interest expense following the refinancing of high-cost debt are contributing to slightly improving FCF (CFO less capital expenditures and dividends to associates and minorities), but the level remains weak, both on an absolute basis and compared with the company's peer group. During 2016, Tenet issued $750 million of second-lien notes and used the bulk of the proceeds to fund a $517 million litigation settlement. Without the payment, FCF would have been about breakeven. Uncertain Future of the Affordable Care Act (ACA): The American Health Care Act (AHCA), a Republican-sponsored bill that recently passed the House and is now being debated in the Senate, rolls back the ACA's individual and employer mandates and reduces its enhanced federal funding for Medicaid. This will pressure hospital companies' margins unless offset by cost-saving measures or higher reimbursement. Tenet's management has stated that the ACA has been a headwind to earnings considering its associated cuts to Medicare payments. KEY ASSUMPTIONS Fitch's key assumptions within the rating case for Tenet include: --Top-line growth of about 1.1% 2017 and 1.9% in 2018; this assumes low-single-digit organic growth in the hospital operations segment and mid-single-digit organic growth in the Conifer Health Solutions and ambulatory care segments, and that the recently announced divestiture of Tenet's Houston area hospitals to HCA is completed in 4Q17; --Operating EBITDA margin (Fitch's EBITDA calculation excludes income from affiliates) of 12.1% in 2017 and expanding slightly through the forecast period; --Tenet will spend about $1.3 billion to acquire the remaining 43.7% interest in the USPI joint venture through 2019, including $711 million in 2017; --Capital expenditures of $734 million in 2017, and capital intensity remaining below 4% through 2020; --FCF (CFO less capital expenditures and dividends to associates and minorities) of about $300 million in 2017, and 2017-2020 FCF margin of 1%-2%; --Total debt/EBITDA after dividends to associates and minorities is 7.1x at the end of 2017 and declines to about 6.0x by 2020 due to EBITDA growth and proceeds from hospital divestitures used to repay debt. RATING SENSITIVITIES A reversal in positive trends could result in a negative rating action, particularly if coupled with capital deployment that requires additional debt funding. Specifically, gross debt/EBITDA after associate and minority dividends durably above 7.0x coupled with a cash flow deficit that requires incremental debt funding are likely to cause a downgrade to 'B-'. Maintenance of Tenet's 'B' Issuer Default Rating considers gross debt/EBITDA after associate and minority dividends declining to about 6.0x over the next several years as a result of growth in EBITDA and some divestiture proceeds used for debt repayment. Maintenance of the rating also considers that Tenet will make continued slow progress in expanding operating and FCF margins. An expectation of gross debt/EBITDA after associate and minority dividends sustained near 5.5x and an FCF margin of 3%-4% could result in an upgrade to 'B+'. LIQUIDITY At March 31, 2017, liquidity was provided by $572 million of cash on hand and $998 million of availability on the $1 billion capacity bank revolver. Fitch expects that proceeds from the new debt issuances will be used to refinance all debt maturing in 2018 as well as most of Tenet's 2019 maturities. Tenet's debt agreements do not include financial maintenance covenants aside from a 1.5x fixed-charge coverage ratio test in the bank agreement that is only in effect during a liquidity event, defined as whenever available asset-based lending (ABL) facility capacity is less than $100 million. LTM EBITDA/interest paid equals 2.3x. FULL LIST OF RATING ACTIONS Fitch rates Tenet as follows: Tenet Healthcare Corp. --Long-term IDR 'B'; --Senior secured ABL facility 'BB/RR1'; --Senior secured first-lien notes 'BB-/RR2'; --Senior secured second-lien notes 'B-/RR5'; --Senior unsecured notes 'B-/RR5'. The Rating Outlook is Stable. The Recovery Ratings are pro forma for the refinancing. The 'BB/RR1' and 'BB-/RR2' ratings for Tenet's ABL facility and the senior secured first-lien notes reflect Fitch's expectation of 100% recovery for the ABL facility and 80% recovery for the first-lien secured notes, respectively, under a bankruptcy scenario. The 'B-/RR5' rating on the senior secured second lien notes and senior unsecured notes reflects Fitch's expectations of recovery of 30% of outstanding principal. The ABL facility is assumed to be fully recovered before the other secured debt in the capital structure. The ABL facility is secured by a first-priority lien on the patient accounts receivable of all of the borrower's wholly owned hospital subsidiaries, while the first- and second-lien secured notes are secured by the capital stock of the operating subsidiaries, making the notes structurally subordinate to the ABL facility with respect to the accounts receivable collateral. Fitch estimates an enterprise value (EV) on a going concern basis of $8 billion for Tenet, net of a standard deduction of 10% for administrative claims. The EV assumption is based on a 43% haircut to Fitch's 2017 forecast for Tenet's EBITDA after dividends to associates and minorities. Fitch then applies a 7x multiple based on observation of both recent transactions/takeout and public market multiples in the healthcare industry. Fitch assumes that Tenet would draw $500 million or 50% of the available capacity on the $1 billion ABL facility in a bankruptcy scenario, and includes that amount in the claims waterfall. The revolver is collateralized by patient accounts receivable, and Fitch assumes a reduction in the borrowing base in a distressed scenario, limiting the amount Tenet can draw on the facility. Based on the definitions of the secured debt agreements, Fitch believes that the group of operating subsidiaries that guarantee the secured debt excludes any non-wholly owned and non-domestic subsidiaries, and therefore does not encompass most of the value of the Conifer and ambulatory care segments. At March 31, 2017, about 60% of consolidated LTM EBITDA was contributed by the hospital operations segment, and Fitch uses this value as a proxy to determine the rough value of the secured debt collateral of $4.8 billion. Fitch assumes this amount is completely consumed by the ABL facility and the first-lien lenders, leaving $3.2 billion of residual value to be distributed to the remaining $1.8 billion of first-lien claims, the second-lien secured and unsecured claims. Contact: Primary Analyst Megan Neuburger, CFA Managing Director +1-212-908-0501 Fitch Ratings, Inc. 33 Whitehall Street New York, NY 10004 Secondary Analyst Britton Costa, CFA Senior Director +1-212-908-0524 Committee Chairperson Peter Molica Senior Director +1-212-908-0288 Media Relations: Alyssa Castelli, New York, Tel: +1 (212) 908 0540, Email: alyssa.castelli@fitchratings.com. Summary of Financial Statement Adjustments - --Historical and projected EBITDA is adjusted to add back non-cash stock-based compensation. Relevant Committee Date: Nov. 16, 2016. Additional information is available on www.fitchratings.com Applicable Criteria Criteria for Rating Non-Financial Corporates - Effective from 27 September 2016 to 10 March 2017 (pub. 27 Sep 2016) here Recovery Ratings and Notching Criteria for Non-Financial Corporate Issuers - Effective from 7 April 2016 to 21 November 2016 (pub. 05 Apr 2016) here Additional Disclosures Solicitation Status here#solicitation Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT 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. DIRECTORS AND SHAREHOLDERS RELEVANT INTERESTS ARE AVAILABLE here. 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. Copyright © 2017 by Fitch Ratings, Inc., Fitch Ratings Ltd. and its subsidiaries. 33 Whitehall Street, NY, NY 10004. Telephone: 1-800-753-4824, (212) 908-0500. Fax: (212) 480-4435. Reproduction or retransmission in whole or in part is prohibited except by permission. All rights reserved. In issuing and maintaining its ratings and in making other reports (including forecast information), Fitch relies on factual information it receives from issuers and underwriters and from other sources Fitch believes to be credible. Fitch conducts a reasonable investigation of the factual information relied upon by it in accordance with its ratings methodology, and obtains reasonable verification of that information from independent sources, to the extent such sources are available for a given security or in a given jurisdiction. The manner of Fitch’s factual investigation and the scope of the third-party verification it obtains will vary depending on the nature of the rated security and its issuer, the requirements and practices in the jurisdiction in which the rated security is offered and sold and/or the issuer is located, the availability and nature of relevant public information, access to the management of the issuer and its advisers, the availability of pre-existing third-party verifications such as audit reports, agreed-upon procedures letters, appraisals, actuarial reports, engineering reports, legal opinions and other reports provided by third parties, the availability of independent and competent third- party verification sources with respect to the particular security or in the particular jurisdiction of the issuer, and a variety of other factors. Users of Fitch’s ratings and reports should understand that neither an enhanced factual investigation nor any third-party verification can ensure that all of the information Fitch relies on in connection with a rating or a report will be accurate and complete. Ultimately, the issuer and its advisers are responsible for the accuracy of the information they provide to Fitch and to the market in offering documents and other reports. In issuing its ratings and its reports, Fitch must rely on the work of experts, including independent auditors with respect to financial statements and attorneys with respect to legal and tax matters. Further, ratings and forecasts of financial and other information are inherently forward-looking and embody assumptions and predictions about future events that by their nature cannot be verified as facts. As a result, despite any verification of current facts, ratings and forecasts can be affected by future events or conditions that were not anticipated at the time a rating or forecast was issued or affirmed. The information in this report is provided “as is” without any representation or warranty of any kind, and Fitch does not represent or warrant that the report or any of its contents will meet any of the requirements of a recipient of the report. A Fitch rating is an opinion as to the creditworthiness of a security. This opinion and reports made by Fitch are based on established criteria and methodologies that Fitch is continuously evaluating and updating. Therefore, ratings and reports are the collective work product of Fitch and no individual, or group of individuals, is solely responsible for a rating or a report. The rating does not address the risk of loss due to risks other than credit risk, unless such risk is specifically mentioned. Fitch is not engaged in the offer or sale of any security. All Fitch reports have shared authorship. Individuals identified in a Fitch report were involved in, but are not solely responsible for, the opinions stated therein. The individuals are named for contact purposes only. A report providing a Fitch rating is neither a prospectus nor a substitute for the information assembled, verified and presented to investors by the issuer and its agents in connection with the sale of the securities. Ratings may be changed or withdrawn at any time for any reason in the sole discretion of Fitch. Fitch does not provide investment advice of any sort. Ratings are not a recommendation to buy, sell, or hold any security. Ratings do not comment on the adequacy of market price, the suitability of any security for a particular investor, or the tax-exempt nature or taxability of payments made in respect to any security. Fitch receives fees from issuers, insurers, guarantors, other obligors, and underwriters for rating securities. Such fees generally vary from US$1,000 to US$750,000 (or the applicable currency equivalent) per issue. In certain cases, Fitch will rate all or a number of issues issued by a particular issuer, or insured or guaranteed by a particular insurer or guarantor, for a single annual fee. Such fees are expected to vary from US$10,000 to US$1,500,000 (or the applicable currency equivalent). The assignment, publication, or dissemination of a rating by Fitch shall not constitute a consent by Fitch to use its name as an expert in connection with any registration statement filed under the United States securities laws, the Financial Services and Markets Act of 2000 of the United Kingdom, or the securities laws of any particular jurisdiction. Due to the relative efficiency of electronic publishing and distribution, Fitch research may be available to electronic subscribers up to three days earlier than to print subscribers. For Australia, New Zealand, Taiwan and South Korea only: Fitch Australia Pty Ltd holds an Australian financial services license (AFS license no. 337123) which authorizes it to provide credit ratings to wholesale clients only. Credit ratings information published by Fitch is not intended to be used by persons who are retail clients within the meaning of the Corporations Act 2001

Our Standards:The Thomson Reuters Trust Principles.
0 : 0
  • narrow-browser-and-phone
  • medium-browser-and-portrait-tablet
  • landscape-tablet
  • medium-wide-browser
  • wide-browser-and-larger
  • medium-browser-and-landscape-tablet
  • medium-wide-browser-and-larger
  • above-phone
  • portrait-tablet-and-above
  • above-portrait-tablet
  • landscape-tablet-and-above
  • landscape-tablet-and-medium-wide-browser
  • portrait-tablet-and-below
  • landscape-tablet-and-below