On Thursday, Moody’s Investors Service, a division of Moody’s Corporation (MCO), upgraded the corporate family ratings and the probability default ratings for Tenet Healthcare Corporation (THC). Moody’s also raised debt ratings on several senior notes issued and its revolving credit facility of $800 million, keeping the outlook for all ratings “stable.”
Given the company’s improved growth outlook for 2010, which it issued on June 14, Moody’s raised Tenet’s corporate family rating and the default rating to “B2” from “B3”.
Accordingly, Tenet boosted its earnings guidance for 2010 to 27–40 cents per share, up from 14-19 cents per share expected before. Excluding discontinued operations, litigation and investigation costs, Tenet projected operating earnings per share of 34-41 cents, up from a previous forecast of 24-32 cents.
Additionally, Tenet has a five-year $800 million senior secured revolving credit facility, which matures on November 16, 2011. There were no cash borrowings outstanding under the revolving credit facility as of March 31, 2010, although the borrowing capacity was worth $532 million. Tenet also had approximately $181 million of letters of credit outstanding at the end of its first quarter.
Further, Tenet eliminated its debt by repurchasing 91/4% senior notes due 2015 for a cash amount of $6 million in March 2010.
Although Moody’s has upgraded its ratings, the new rating is still in Moody’s “speculative” category, indicating high credit risk.
According to Moody’s, the ratings reflect concerns over the health care sector, including costs related to uncompensated care. Moody’s also stated that approximately $5.3 billion of rated debt is impacted and Tenet is expected to use cash from operations to cut down its debt.
Tenet believes that its operating cash flow is negatively impacted by lower levels of cash collections and higher levels of bad debt, resulting from changes in the business mix and due to the increase in the number of admissions of uninsured and underinsured patients.
In addition, the business operations are also influenced by industry-wide and company-specific challenges, including unpredictable volumes, slowing demand for in-patient cardiac procedures and high levels of bad debt, which negatively impact revenue growth and operating expenses.
The company has noted that disciplined cost management and improved admissions drove earnings higher in the recent periods. Tenet expects to continue to improve its operating costs and also expects a smaller decline in the number of paying admissions.
Outlook
We believe that volume growth can significantly help achieve future profitability, including growth through the acquisition of hospitals and other health care facilities. We also expect appropriate reimbursement levels and cost control across the portfolio of hospitals to facilitate better cost management and business operations.
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Read the full analyst report on “MCO”
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