(The following statement was released by the rating agency) Overview U.S.-based hospital operator LifePoint Hospitals Inc. is refinancing the balance of its term loan B with a $450 million term loan A facility, and replacing its existing revolving credit agreement with a new $350 million facility that expires in five years. Debt levels are virtually unchanged. We are affirming our 'BB-' corporate credit rating on LifePoint, and assigning our 'BB-' issue-level rating and '3' recovery rating to its proposed senior secured facilities. We are affirming our 'BB-' issue-level rating on the company's existing senior secured debt, with a '3' recovery rating, and 'B' rating on its subordinated debt, with a '6' recovery rating. Our stable rating outlook on LifePoint reflects our view that it will continue balancing cash flow and possible additional share repurchases so that its financial risk profile remains near its current level. Rating Action On July 25, 2012, Standard & Poor's Ratings Services affirmed its 'BB-' corporate credit and senior debt ratings, and 'B' subordinated debt ratings on Brentwood, Tenn.-based LifePoint Hospitals Inc. At the same time, we assigned 'BB-' issue-level ratings (the same as the corporate credit rating) and '3' recovery ratings to LifePoint's proposed $450 million term loan A debt and $350 million revolver, each due in 2017. The '3' recovery rating indicates our expectation of meaningful (50%-70%) recovery for lenders in the event of default. The issue-level and recovery ratings on the senior secured debt reflect the equal right of payment with the unsecured notes. Because the secured debt only has a pledge of subsidiaries' stock, rather than assets, we treat the secured debt effectively as unsecured. Rationale The ratings on LifePoint Hospitals Inc. incorporate our assessment that the rural hospital chain has a "weak" business risk profile, given its relatively limited size and market exposure, and reimbursement risk. We view Lifepoint's financial risk profile as "significant," reflecting a debt-to-EBITDA level that ranges within its publicly stated 3x-4x target. LifePoint's weak business risk profile reflects the particular challenges LifePoint faces amid industry utilization pressures. While 52 of its 55 hospitals are sole community providers, average market shares are under 60%, given competition from tertiary care facilities in other communities and outpatient centers. LifePoint attempts to limit patient outmigration to facilities in other communities by expanding the breadth of its services. However, the limited supply of health care professionals in its largely nonurban markets is a hurdle, especially in relatively profitable specialties, such as oncology, cardiology, and orthopedics. The market concentration of its facility portfolio and nonurban nature of its comparatively small hospitals, averaging 112 beds, exposes LifePoint to a number of vagaries. LifePoint has particular exposure to Medicaid reimbursement changes in four states that generate aboutone-half of its revenues, Kentucky, Virginia, Tennessee, and New Mexico. Its lower-acuity case mix makes LifePoint especially sensitive to seasonal variations in demand, such as the strength of the flu season. LifePoint's facilities also may be more subject to economic weakness, because their communities often depend on a small number of larger employers. Its hospitals also are often handicapped by local requirements to offer service lines that operate at a loss or that have much lower margins. LifePoint's EBITDA margins historically have been at least 100 basis points below those of HCA (B+/Stable/--): Its hospitals average 255 beds in size and are in more densely populated areas. With its larger and more geographically diverse 163-hospital portfolio, we view HCA as having a "fair" business risk profile, somewhat stronger than LifePoint. We also view Community Health Systems (B+/Stable/--), a 134-hospital chain also larger and more diverse than LifePoint, as having a fair business risk profile. We expect relatively steady demand for essential health care services to stay clouded by industry-wide sluggishness in hospital admissions, uncertain third-party reimbursement, and increasing levels of uncompensated care. We expect little improvement in LifePoint's same-hospital activity through 2013, given a first-quarter 2012 decline in same-store adjusted admissions of 0.4%, year to year, that followed a similar decline in 2011. Third-party payors, such as commercial insurers (47% of revenues), Medicare (37%), and Medicaid (13%) are attempting to limit their beneficiary costs. Consequently, patients with increasingly complex needs are being treated in outpatient centers, and those needing lower-acuity procedures more frequently are treated in physician offices and other nonhospital outpatient settings. We assume low-single-digit reimbursement rate increases through 2013. The heavy mix of commercial pay should benefit from rate hikes that could range up to the mid-single digits, and outpace more modest increases by government payors. Medicare rates for hospitals increased only about 1% for 2012, and remain under Federal budget scrutiny. Medicaid programs for the indigent also are under pressure from their budget-constrained state sponsors, suggesting minimal rate increases. Uncompensated care is likely to remain significant in the year ahead, as it lags changes in the level of unemployment. Our economists expect the U.S. unemployment rate to be around 8% through 2013. We also believe an underlying uptrend in self-pay likely will be dictated by rising insurance deductibles and copayments under less-generous employee health coverage. Difficult-to-collect self-pay billings, tied to the uninsured and underinsured, were up 17% in 2011 (and up 13% in the first quarter of 2012); the provision for doubtful accounts (which is deducted from gross revenues) also jumped 17% in 2011(up 13% in the 2012 first quarter). Our base-case scenario assumes mid-single-digit organic revenue growth that reflects higher prices and outpatient activity (which rose 5% in the first quarter of 2012), partially offset by continued sluggish admissions. This revenue growth would outpace the 2% rise in GDP expected by our economists in their base case for 2012 and 2013. (Same-hospital revenues were up 8%, year to year, in the 2012 first quarter, and up 6% in 2011, versus 2010.) We expect margins to hover around the 18% level of recent experience, as price increases compensate for the lower initial profitability of acquisitions. LifePoint's leverage remains consistent with its "significant" financial risk profile, considering its acquisition and share repurchase activity. We expect an EBITDA increase through 2013 nearly in line with the revenue growth we anticipate during that time, aided by improvement in the low-margins of newly acquired facilities. The EBITDA improvement, and limited borrowing needs for its ongoing operations, could keep leverage at the low end of LifePoint's 3x-4x target range. This provides capacity within the context of the current rating for debt-financed acquisitions. Over the past two years, acquisitions totaled $300 million, including investments as part of its growing partnership with Duke University. Share repurchases totaled $65 million in the first quarter of 2012, leaving $185 million available under a stock buyback authorization. Liquidity LifePoint's liquidity is adequate for its needs, with sources of cash to exceed uses within the next few years. Relevant aspects of LifePoint's liquidity are: We expect coverage of uses to be over 1.2x in the next 12 to 18 months.
-- Sources of liquidity incl