When the credit markets were gushing the past few years, for-profit hospital chains filled their canteens. Whether they were prescient or merely lucky, they appear to have gathered enough liquidity to stay quenched through what could be a few dry years in credit markets, analysts say.
Among the six largest investor-owned hospital companies, five of them tapped heavily into the credit markets between 2003 and 2007. Tenet Healthcare Corp., Dallas, restructured its debt load to push back maturities to 2011 as part of its reaction to the troubles the company experienced starting in fall 2002. LifePoint Hospitals, Brentwood, Tenn., has already paid down a significant portion of the debt it took on to buy Province Hospital Co. in 2005.
In 2006, Nashville-based HCA relied mostly on debt in its $33 billion leveraged buyout that made it a private company for the third time. In 2007, Health Management Associates, Naples, Fla., issued debt to pay shareholders a one-time dividend of $10 per share, and Community Health Systems, Franklin, Tenn., borrowed to fund its acquisition of Triad Hospitals, Plano, Texas.
The lone holdout, Universal Health Services, King of Prussia, Pa., is also the lone investment-grade credit among for-profit hospital providers.
These companies also have managed to limit their exposure to variable-rate debt, either with fixed-rate debt or by hedging their variable-rate debt, so the spike in variable-rate debt that has plagued not-for-profits isnt a significant factor for them, says Lauren Coste, director of corporate finance at Fitch Ratings.
I think overall, the industry is pretty well-positioned, Coste says. There are not a lot of maturities coming due, and they have good liquidity, enough to get them through this current market position.
Among the six largest investor-owned chains, the maturity schedule is fairly light for 2009 and 2010 (See chart). Only the largest company, HCA, faces significant maturities before 2011, Coste says. We think its going to be difficult for them to meet these maturities with cash flow from operations, she adds. They may need to refinance or sell assets or cut back on capital spending. The company can refinance by tapping into credit facilities with $1.6 billion in borrowing capacity remaining on them, Coste notes.
HCA intends to meet its debt obligations over the next two or three years with cash from operations and existing credit facilities, a company spokesman said in an e-mail.
Tenet, meanwhile, has no significant debt maturing until December 2011, but the company has been burning through about $500 million in cash annually during its turnaround, Coste says. They have improved their operations, and they are improving their cash position.
The company netted $160 million when it sold its stake in Dallas-based Broadlane, a group purchasing organization that Tenet started and later spun off. Tenet has a pending deal with the University of Southern California to sell 162-bed USC University Hospital and 60-bed USC-Norris Comprehensive Cancer Center and Hospital, both in Los Angeles, to the university for $311 million. The company also is looking to sell its portfolio of medical office buildings and has shed some hospitals that were a drag on cash flows, Coste adds. The cash drains, she says, included the two campuses of 151-bed Encino-Tarzana Regional Medical Center in the Los Angeles area and 176-bed Irvine (Calif.) Regional Hospital and Medical Center, which is scheduled to close in January before the property owner, HCP, leases the property to not-for-profit, 419-bed Hoag Memorial Hospital Presbyterian, Newport Beach, Calif.
Its really a waiting game to see how the capital markets are going to look when the companies need to tap them, Coste says. Fortunately, the companies dont need to go to the markets right now.
The effects of the economic slowdown are likely to have a bigger impact than the credit crunch, says David Bachman, a senior research analyst covering healthcare facilities for Longbow Research. Still, tighter credit will be a drag on capital investment in hospitals, he adds. As borrowing costs rise, investments in new equipment or facility renovations become more expensive, and thats exacerbated by the prospect that the weakening economy will lower the revenue that can be expected to result from the capital spending, Bachman says.
Theyre going to be faced with a bit of a dilemma, Bachman says. If your capital expenditures fall below a certain level, it does you long-term harm. Tenet had to squeeze investments in its hospitals when it was hoarding cash in anticipation of paying settlements related to its Medicare outlier problems, and the company is still working to win back physicians who abandoned its hospitals during that time, Bachman says.
On the other hand, Bachman notes, credit has been tightening for not-for-profit competitors, too. Its really going to be a case-by-case scenario where one hospital is in a relatively stronger position (than) its competitor, and that hospital is going to have the chance to grab market share, he says.
Investment objectives for 2008 are probably going to be completed, Bachman says, but the outlook for 2009 is complicated. A sales representative for a major equipment manufacturer told Bachman that his company is worried that tight credit, a weak economy and soft patient volumes will translate into very conservative investment plans for 2009, Bachman says.
Both Coste and Bachman expect the investor-owned companies to be quiet on the acquisition front. LifePoint and Universal have more ability to make acquisitions than the others, Coste says.
Three of the companiesCommunity, HMA and Universalreported earnings last week for the quarter ended Sept. 30. Steve Filton, Universals senior vice president and chief financial officer, says the economic slowdown had a small impact in the quarter. Hospital companies may see less impact on employer-sponsored health insurance during this downturn vs. past ones because employer-sponsored coverage has already deteriorated so dramatically, Filton says. That perhaps will lessen the impact of the weak economy, although it also means that hospitals have to deal on a long-term basis with more uninsured patients and more patients who shoulder some financial responsibility for their medical bills, Bachman says.
The publicly traded for-profit companies have seen their stocks hammered over the past six weeks just like the rest of the stocks in the market, Bachman says, even though hospitals are often seen as defensive stocks during economic downturns.
The concerns about the credit markets and the economy come on top of the usual political uncertainty of a presidential election year, Bachman adds. Not only are decisionmakers trying to figure out how to navigate through the uncertain regulatory future and the political change in Washington, but also youve got this downturn that is almost unprecedented, and no one has a very good sense of whether its going to improve in 2009 or whether were halfway through it or somewhere near the beginning, Bachman says. If there is a steep or long downturn, what does that do to healthcare reform?