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Moody's Affirms Rating on Tenet Healthcare (THC); Concludes Review Following Aspen Healthcare Acquisition Announcement

May 21, 2015 2:17 PM EDT

Moody's Investors Service (Moody's) confirmed the B1 Corporate Family Rating and B1-PD Probability of Default Rating of Tenet Healthcare (NYSE: THC). Moody's also affirmed the company's Speculative Grade Liquidity Rating of SGL-2. The rating outlook is negative. These actions conclude the review for downgrade that commenced on March 23, 2015 when Tenet announced that the company had signed a definitive agreement to enter into a joint-venture transaction with Welsh, Carson, Anderson & Stowe (WCAS) and acquire Aspen Healthcare Ltd. The joint venture will combine the ambulatory surgery centers, surgery hospitals and imaging assets of Tenet with United Surgical Partners International (USPI).

The following is a summary of Moody's rating actions.

Ratings confirmed:

Corporate Family Rating at B1

Probability of Default Rating at B1-PD

Senior secured notes at Ba2 (LGD 2)

Senior unsecured notes at B3 (LGD 5)

Rating affirmed:

Speculative Grade Liquidity Rating at SGL-2

The rating outlook is negative

RATINGS RATIONALE

The B1 Corporate Family Rating reflects Tenet's high financial leverage and an aggressive debt-funded acquisition strategy. Tenet has added scale and earnings diversification through its recent acquisitions but to date has not fully benefited from synergies, which has held leverage high. However, Tenet's significant scale in each of its service lines and Moody's expectation that the company can successfully integrate newly acquired businesses support the rating. Moody's also anticipates that Tenet will remain disciplined in the use of incremental leverage for shareholder initiatives or other acquisitions until debt to EBITDA is reduced closer to 5.0 times.

The negative rating outlook reflects Moody's expectation that debt/EBITDA less minority interest will remain around 6.0 times over the next 12 months and that the company will remain acquisitive and continue to grow its base of diversified healthcare offerings. The outlook reflects Moody's view that Tenet has very little cushion to absorb negative developments at the current rating level given its high leverage and the considerable synergies and growth opportunities that will need to be realized before cash flow and interest coverage metrics improve meaningfully.

Tenet's ratings could be downgraded if operational challenges or future leveraged acquisitions cause a deterioration in financial metrics such that debt/EBITDA is not expected to decline to a level approaching 5.0 times over the next two years. The ratings could also be downgraded if Tenet incurs additional debt to fund material shareholder distributions or share repurchases. Finally, a deterioration in liquidity, either through negative free cash flow or reliance on the company's revolver, which expires in 2016, could also result in a downgrade.

Given the high financial leverage a rating upgrade is not likely in the near term. However, if Tenet is able to reduce and sustain leverage below 4.0 times, the ratings could be upgraded. Tenet would also have to effectively integrate and realize synergies from its recent acquisitions and maintain a more measured approach to debt-funded transactions that enable the company to improve cash flow and interest coverage metrics prior to a rating upgrade.

The principal methodology used in these ratings was Global Healthcare Service Providers published in December 2011. Other methodologies used include Loss Given Default for Speculative-Grade Non-Financial Companies in the U.S., Canada and EMEA published in June 2009. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.



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