Fitch Ratings has assigned a 'BB-/RR1' rating to Tenet Healthcare Corporation's (Tenet) $141 million 6.25% senior secured notes due 2018 and a 'B/RR3' rating to Tenet's $150 million 8% senior notes due 2020. The notes are add-ons to outstanding note issues and proceeds will be used to repurchase mandatory convertible preferred stock. Tenet's Issuer Default Rating (IDR) is currently 'B-'. The Rating Outlook is Positive. The ratings apply to approximately $4.5 billion of debt at Dec. 31, 2011. A full ratings list is provided below.
RATING RATIONALE:
--While Tenet's liquidity and financial flexibility have recently improved, the company's ability to generate positive free cash flow (FCF) remains strained.
--Otherwise, Tenet's liquidity profile is solid. Near-term debt maturities are limited and the company has adequate available liquidity in cash on hand and credit revolver availability.
--Organic operating trends in the for-profit hospital industry are weak, and Fitch expects weak patient utilization trends and the associated drag on top-line performance to persist throughout the rest of 2012.
--Tenet has made significant progress in improving its industry lagging profitability since 2008 and Fitch believes that Tenet has made some durable reductions to its cost structure.
Positive Trend in Credit Metrics:
Tenet's credit metrics, including debt leverage and interest coverage, are strong relative to the 'B-' IDR. Proceeds of the notes issue will be used to retire mandatory convertible preferred stock, resulting in a 0.3 times (x) increase in debt-to-EBITDA. Pro forma for the add-on notes issuance, Fitch calculates gross debt-to-EBITDA of 4.1x and EBITDA-to-latest 12 months (LTM) interest expense of 3.0x. Leverage through the secured debt is 2.4x. Debt leverage has declined dramatically since 2007, dropping to near 4.0x from 6.5x due to growth in EBITDA.
Improving Financial Flexibility:
During 2011, Tenet made progress in extending debt maturities and refinancing some of its higher cost debt. In November 2011, Tenet issued $900 million of 6.25% senior secured notes due 2018 and used a portion of the proceeds to refund the $714 million 9% senior secured notes maturing 2015. Also in November 2011, Tenet entered into an amendment to its credit facility, extending final maturity by one year, to November 2016. There is a springing maturity under the bank facility to fourth-quarter 2014 unless the company refinances $238 million of its $474 million 9.25% senior notes maturing 2015.
Tenet's debt agreements do not include financial maintenance covenants, except for a 2.0x fixed charge coverage ratio test under the bank facility that is in effect whenever availability under the revolver is less than $80 million (at Dec. 31, 2011 availability was $574 million).
Strained FCF Profile:
Tenet's negative FCF (cash from operations less capital expenditures and dividends) profile remains the most important credit risk. In 2011, Fitch calculates FCF for Tenet of negative $2 million. The rate of cash burn has been steadily improving over the past several years, showing continued incremental progress in achieving positive cash flow. Fitch's projects that Tenet's FCF will be slightly positive in 2012 based in part on improved profitability, lower litigation expense, and positive cash tax implications of a $1.8 billion net operating loss.
Improvement in Operating Results:
After lagging the broader industry in its patient volume trends in 2009 and 2010, Tenet's volume trends shifted favorably beginning in 2011. For the first quarter of 2012 (1Q'12), Tenet reports adjusted admissions growth of 2.8%, its sixth consecutive quarter of positive growth. Positive volume growth has helped the company improve its industry lagging profitability. Although Tenet continues to be less profitable than its peers, a 55 basis points (bps) improvement in its Dec. 31, 2011 LTM EBITDA margin to 12.2% versus its 2010 EBITDA margin of 11.65% indicates that it is making incremental progress in closing the gap.
Shareholder Friendly Cash Deployment:
Fitch believes that Tenet's capital deployment has recenlty become more shareholder friendly, as evidenced by retirement of the preferred stock. The company has also deployed cash for share repurchases in recent periods. In 2011, Tenet spent about $375 million of cash on share buy-backs. This was the first time the company has bought back shares in recent history. During 1Q'12 the company reports that it repurchased $26 million worth of shares.
GUIDELINES FOR FURTHER RATING ACTIONS:
An upgrade to a 'B' IDR for Tenet would be consistent with credit metrics maintained at current levels, coupled with an expectation of sustained positive FCF generation. More clarity on Tenet's cash deployment strategy would also support an upgrade in light of the company's recently more shareholder friendly capital deployment. A negative rating action for Tenet is unlikely in the near term.
DEBT ISSUE RATINGS:
Fitch currently rates Tenet as follows:
--IDR 'B-';
--Senior secured credit facility and senior secured notes 'BB-/RR1';
--Senior unsecured notes 'B/RR3'.
Tenet's Recovery Ratings (RR) reflect Fitch's expectation that a going concern scenario will result in a greater enterprise value for the company than liquidation. Fitch uses a 7.0x distressed enterprise value multiple. The Dec. 31, 2011 LTM EBITDA is stressed by 40%, considering post restructuring estimates for interest and rent expense and maintenance level capital expenditure.
Fitch estimates Tenet's distressed enterprise valuation in restructuring to be approximately $4.9 billion. The 'BB-/RR1' rating for the senior secured bank facility and senior secured notes reflects Fitch's expectations for 100% recovery for these creditors. The 'B/RR3' rating on the senior unsecured notes rating reflects Fitch's expectations for recovery in the 51% - 71% range.
Total debt of $4.5 billion at Dec. 31, 2011 consisted primarily of:
Senior unsecured notes:
--$57 million due 2012;
--$216 million due 2013;
--$60 million due 2014;
--$474 million due 2015;
--$600 million due 2020;
--$430 million due 2031.
Senior secured notes:
--$714 million due 2018;
--$900 million due 2018;
--$925 million due 2019.
Additional information is available at 'www.fitchratings.com'. The ratings above were unsolicited and have been provided by Fitch as a service to investors.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 12, 2011).
Applicable Criteria and Related Research:
Corporate Rating Methodology
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=647229
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