Fitch gives Tenet 'Negative' credit outlook over United Surgical Partners deal

Tenet Healthcare's Dallas headquarters. (Google image)

Credit agency Fitch Ratings this week cut its credit outlook for Tenet Healthcare Corp. from ‘Stable’ to ‘Negative’ over concern about cash flow due to Tenet assuming $2.4 billion in debt tied to its proposed partnership-takeover of United Surgical Partners International, especially since it plans to fully acquire the ambulatory services chain in five years.

“The Negative Rating Outlook illustrates that a downgrade could result if Fitch does not expect Tenet's cash generation to be sufficient to fund the bulk of cash outflows associated with future acquisitions, both of remaining USPI interests from Welsh Carson and otherwise,” analysts wrote in the March 24 statement.

Fitch said Tenet would need free cash flow of $300 million by 2016 to avoid acquiring more debt.

[Also: Tenet takes majority stake in ambulatory company]

The outlook change is not a downgrade, and has no effect on Tenet’s credit rating.

Tenet on Monday announced the deal to take a 50.1 percent stake in USPI from owners Welsh, Carson, Anderson & Stowe for $425 million in cash, a joint venture that would make it the largest ambulatory services provider in the United States.

Tenet said it would raise $2.4 billion in debt to fund the deal and restructure USPI’s debt.

The money would also help pay for its separate takeover of United Kingdom hospital chain Aspen Healthcare.

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Competing credit agency Standard & Poor's, however, said it did not think the joint venture would affect Tenet's liquidity enough to warrant an outllook change.

"At this point, we do not expect the transaction to raise discretionary cash flow, which includes dividends to minority interest, above $200 million, our threshold for an upgrade," S&P analyst Tulip Lim said.

According to Fitch, the deal will sting Tenet’s balance sheet early on in the form of reduced operating cash, but said the deal offers a lot of benefits to Tenet as well.

“It will improve Tenet's overall diversification and payor mix, markedly boost Tenet's somewhat laggard position in outpatient services, and add to growth potential going forward,” analysts wrote. “The USPI business will also provide Tenet with an offset to Fitch's expectation for flat to declining inpatient volumes due to a volumes shift toward lower-cost settings.”

Fitch also raised concerns about the deal coming at a time when Tenet is still integrating Vanguard Health Systems, which it acquired for $4.3 billion in 2013.

“Hospital industry management teams are contending with a very dynamic operating environment due to the implementation of the ACA, the evolution of payment schemes, and other regulatory reforms influencing organic operating trends,” the report said. “Tenet is now adding the complex partnership-driven business model of USPI on top of the ongoing integration of Vanguard, which was Tenet's largest major acquisition in recent history and included a large schedule of in-progress and recently completed capital expansion projects.”

However, Fitch said it expects the USPI deal will improve Tenet’s payer mix and diversify its business. The company also expects the trend in lower uncompensated care driven by the Affordable Care Act will help its cash flow.

Note: This story was update to include comments from S&P.

Twitter: @HenryPowderly