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TEXT-S&P affirms LifePoint Hospitals ratings
July 25, 2012 / 3:12 PM / 5 years ago

TEXT-S&P affirms LifePoint Hospitals ratings

 (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

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