Fitch: For-Profit Hospital Industry at Limited Risk for More Buyouts

Fitch Ratings believes there is little potential for additional leveraged buyout (LBO) activity in the U.S. for-profit hospital industry in the near-future based on challenges in ownership and projected returns on investment, as discussed in a report published today.

In the past year, the for-profit hospital industry has witnessed two LBOs and a leveraged re-capitalization, and speculation is mounting that continued LBOs are possible among the remaining publicly traded hospital operators. Fitch’s report presents a detailed analysis of the likelihood of an LBO for each provider as well as the potential impact such an event would have on each company and its debt-holders. If an LBO were to occur, Fitch believes that among the five remaining publicly traded hospital companies, Community Health Systems would be the most likely target.

‘Recent challenges such as rising bad debt and stagnant volumes have led to low valuations for many providers in the equity markets over the past few years, opening the door for the private equity market,’ said Lauren Coste, Director, Fitch Ratings.

In addition, the industry has relatively stable cash flows and strong financial flexibility. Private investors have numerous ways to extract value from the business, such as decreasing capital expenditures or divesting assets. Finally, there is the potential for valuations across the industry to improve over the next few years as volume naturally increases with the aging of the population. Although there are several industry-specific features that would attract an LBO, Fitch notes in the report that each of the remaining potential targets has individual features in its respective operating and financial profile that would its hinder success.

The report also lists key covenants related to change of control and limitations on secured debt for each of the hospital operators.

The full report ‘For-Profit Hospital Industry at Limited Risk for More LBOs’ can be found on the Fitch Ratings web site at www.fitchratings.com.