Fitch Ratings has affirmed Triad Hospitals, Inc. debt as
follows:
-- Issuer Default Rating (IDR) at 'BB-',
-- Senior secured bank facility at 'BB+',
-- Senior unsecured notes at 'BB-',
-- Senior subordinated notes at 'B+'
The Rating Outlook remains Stable.
The affirmation is driven by strong company specific operating results despite industry pressures of bad debt and volumes. The company continues to successfully execute the business strategy of growth through joint ventures and acquisitions. Negative industry trends and potential for shareholder-friendly activity (i.e. share repurchases) weigh down the company's credit profile. Despite the negative free cash flow Fitch is not concerned, as discretionary cash is being used to grow the business (representing approximately 65% of capital expenditures).
Triad's developmental strategy, involving community collaboration, tends to be mostly financed with cash flow. This model helps the company to close more favorable deals and retain strong physician and community relationships, as significant decision-making control is left to these individuals. Fitch anticipates debt will trend higher through revolver borrowings as development activity in the remainder of 2006 and 2007 continues to exceed company norms of three to five hospitals per year. Leverage is expected to remain relatively stable, as earnings should increase in line with its growth strategy.
Total debt at June 30, 2006 was approximately $1.7 billion. Fitch anticipates that fiscal year 2006 coverage (Operating EBITDA/interest) will be between 6.2 times (x)-6.5x and leverage (total debt/EBITDA) will be around 2.2x. Primary liquidity is provided by cash from operations and the company's $600 million revolving credit facility (offset by $22.6 million in outstanding letters of credit at June 30, 2006). Fitch expects that Triad will generate over $400 million in net cash from operating activities in 2006. A two-notch rating on the bank facility reflects strong collateral coverage for the secured facility.
Triad's other debt includes a 7% senior unsecured note due 2012 and a 7% subordinated note due 2013. Both notes have change of control provisions. The secured credit facility also has a change of control provision and limits payments on several items, most notably dividends.
The recent industry trends of increasing bad debts and softer volumes are affecting Triad and their peers' margins. These trends are expected to continue as more individuals become self-insured. The soft volumes stem from patients taking a more active role in treatment decisions, as well as from competing physician-run surgery centers. Triad's strong physician and community relationships help mitigate this impact. Bad debt expense is somewhat mitigated by programs such as charity care and self-pay discounts, but continues to be unpredictable and growing. Bad debt as a percent of sales is up from a year ago to 9.3% from 7.7%, and excluding self-pay discounts, up to 12.5% from 10.8%.
Triad's pricing, similar to its peers, has fared better than expected. Inpatient revenues per admission for Triad were up 9.5% year over year (YOY) in the second quarter and have achieved YOY growth in the high single digits to low double digits for the past four quarters. Reimbursement expectations for 2007 are expected to be relatively in line with 2006, with an approximately 3%-3.5% increase in Medicare and a 5%-7% increase from private-payors.
With a portfolio of 52 general acute care hospitals and 12 ambulatory surgery centers, Triad Hospitals, Inc. is one of the largest publicly owned hospital management companies in the U.S. Triad concentrates it operations (hospitals and ambulatory surgery centers) in small cities and selected urban markets primarily in the southern, midwestern, and western U.S.
Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, 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.
-- Issuer Default Rating (IDR) at 'BB-',
-- Senior secured bank facility at 'BB+',
-- Senior unsecured notes at 'BB-',
-- Senior subordinated notes at 'B+'
The Rating Outlook remains Stable.
The affirmation is driven by strong company specific operating results despite industry pressures of bad debt and volumes. The company continues to successfully execute the business strategy of growth through joint ventures and acquisitions. Negative industry trends and potential for shareholder-friendly activity (i.e. share repurchases) weigh down the company's credit profile. Despite the negative free cash flow Fitch is not concerned, as discretionary cash is being used to grow the business (representing approximately 65% of capital expenditures).
Triad's developmental strategy, involving community collaboration, tends to be mostly financed with cash flow. This model helps the company to close more favorable deals and retain strong physician and community relationships, as significant decision-making control is left to these individuals. Fitch anticipates debt will trend higher through revolver borrowings as development activity in the remainder of 2006 and 2007 continues to exceed company norms of three to five hospitals per year. Leverage is expected to remain relatively stable, as earnings should increase in line with its growth strategy.
Total debt at June 30, 2006 was approximately $1.7 billion. Fitch anticipates that fiscal year 2006 coverage (Operating EBITDA/interest) will be between 6.2 times (x)-6.5x and leverage (total debt/EBITDA) will be around 2.2x. Primary liquidity is provided by cash from operations and the company's $600 million revolving credit facility (offset by $22.6 million in outstanding letters of credit at June 30, 2006). Fitch expects that Triad will generate over $400 million in net cash from operating activities in 2006. A two-notch rating on the bank facility reflects strong collateral coverage for the secured facility.
Triad's other debt includes a 7% senior unsecured note due 2012 and a 7% subordinated note due 2013. Both notes have change of control provisions. The secured credit facility also has a change of control provision and limits payments on several items, most notably dividends.
The recent industry trends of increasing bad debts and softer volumes are affecting Triad and their peers' margins. These trends are expected to continue as more individuals become self-insured. The soft volumes stem from patients taking a more active role in treatment decisions, as well as from competing physician-run surgery centers. Triad's strong physician and community relationships help mitigate this impact. Bad debt expense is somewhat mitigated by programs such as charity care and self-pay discounts, but continues to be unpredictable and growing. Bad debt as a percent of sales is up from a year ago to 9.3% from 7.7%, and excluding self-pay discounts, up to 12.5% from 10.8%.
Triad's pricing, similar to its peers, has fared better than expected. Inpatient revenues per admission for Triad were up 9.5% year over year (YOY) in the second quarter and have achieved YOY growth in the high single digits to low double digits for the past four quarters. Reimbursement expectations for 2007 are expected to be relatively in line with 2006, with an approximately 3%-3.5% increase in Medicare and a 5%-7% increase from private-payors.
With a portfolio of 52 general acute care hospitals and 12 ambulatory surgery centers, Triad Hospitals, Inc. is one of the largest publicly owned hospital management companies in the U.S. Triad concentrates it operations (hospitals and ambulatory surgery centers) in small cities and selected urban markets primarily in the southern, midwestern, and western U.S.
Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, 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.