Fitch Rates Tenet's Secured Notes 'BB/RR1'; Unsecured Notes 'B-/RR5'; Outlook Negative

<span id="midArticle_start"/>(The following statement was released by the rating agency)NEW YORK, June 03 (Fitch) Fitch Ratings has assigned a 'BB/RR1'rating to Tenet Healthcare Corporation's (Tenet) $900 million senior securednotes due 2020 and a 'B-/RR5' rating to Tenet's $1.9 billion senior unsecured notesdue 2023. Proceeds will be used to fund the planned acquisitions of a50.1% ownership interest in United Surgical Partners International (USPI), andthe purchase of Aspen Healthcare, as well as to refinance certain of Tenet's andUSPI's outstanding debt. KEY RATING DRIVERS--Tenet is among the largest for-profit operators of acute carehospitals in the U.S. and, through the planned acquisition of a majorityownership interest in USPI, will become the largest operator of ambulatory surgery andimaging centers. Scale is increasingly important as U.S. healthcareproviders look to drive efficiencies that offset the effects of an overallconstrained reimbursement environment.--Debt funding of the USPI transaction will prolong thede-leveraging horizon Fitch had considered following the 2013 acquisition of VanguardHealth Systems, Inc. (Vanguard). Opportunities to repay debt are limited overthe ratings horizon given the absence of prepayable bank loans in Tenet'scapital structure, although $750 million of 8% senior notes that are callable at apremium in August 2015 represent debt that could be paid down.--Fitch believes that the structure of the USPI transaction isinitially unfavorable to Tenet's balance sheet. Funding will occur at theparent company level rather than at the joint venture level, which will dilutethe free cash flow (FCF) benefit to Tenet. --The USPI deal is strategically compelling. It will improveTenet's payor mix and markedly boost the company's position in more profitableoutpatient services. The USPI business will also provide Tenet with anoffset to Fitch's expectation for flat to declining inpatient hospital volumes dueto a secular shift toward lower-cost care delivery settings.--Fitch expects improving underlying business fundamentals,particularly at legacy Vanguard, to combine with lower uncompensated care fromthe health insurance expansion components of the Affordable Care Act (ACA)to drive improving FCF generation for Tenet in 2015-2016. --Hospital industry management teams are contending with a verydynamic operating environment due to the implementation of the ACA, theevolution of payment schemes, and other regulatory reforms influencingorganic operating trends. Tenet is now adding the complex partnership-drivenbusiness model of USPI on top of the ongoing integration of Vanguard, which wasTenet's largest acquisition in recent history.KEY ASSUMPTIONSFitch's key assumptions within the rating case for Tenetinclude:--Top-line organic growth of 3%-4% annually, driven bycommercial pricing increases coupled with sustained positive growth in patientvolumes, although some decline is expected versus the very strong volume resultsposted across the hospital industry in the last two quarters;--Operating EBITDA margins sustained above 12% and slightlyexpanding in 2015-2017; --No substantial debt repayment in 2015-2017, except the portionof the current issuances used to refinance debt of USPI and Tenet;--Tenet will spend $1.5 billion to acquire the remaining 49.9%interest in the USPI joint venture through 2019;--Capital expenditures of $1 billion or more in 2015 and 2016.RATING SENSITIVITIESMaintenance of Tenet Healthcare's 'B' Issuer Default Rating(IDR) considers gross debt-to-EBITDA trending toward 5.5x over the next one totwo years. Pro forma for the USPI transaction, Fitch calculates leverage of6.4x. EBITDA growth is expected to be the primary source of deleveraging since Tenetis not expected to have a material amount of prepayable debt after the USPItransaction. If Tenet uses debt to fund the planned acquisition of the other49.9% of the USPI JV, as opposed to equity or cash on hand, it could drive adowngrade of the ratings. A positive rating action is unlikely over the next one to twoyears because of Tenet's weak FCF generation and high leverage. Furthermore, the'B' IDR incorporates the expectation for generally improving operationsin the hospital industry as a result of the ACA and economic improvement in thenear term.FULL LIST OF RATING ACTIONSFitch rates Tenet as follows:--IDR 'B';--Senior secured ABL facility 'BB/RR1';--Senior secured notes 'BB/RR1';--Senior unsecured notes 'B-/RR5'.The Rating Outlook is Negative.Contact: Primary AnalystMegan Neuburger, CFAManaging Director+1 212-908-0501Fitch Ratings, Inc.33 Whitehall StreetNew York, NY 10004Secondary AnalystJacob Bostwick, CPADirector+1 312-368-3169Committee ChairpersonMichael Paladino, CFAManaging Director+1 212-908-9113Media Relations: Alyssa Castelli, New York, Tel: +1 (212) 9080540, Email: alyssa.castelli@fitchratings.com; Elizabeth Fogerty, New York,Tel: +1 (212) 908 0526, Email: elizabeth.fogerty@fitchratings.com.Additional information is available on http://ift.tt/1DUzHLW Criteria Corporate Rating Methodology - Including Short-Term Ratings andParent and Subsidiary Linkage (pub. 28 May 2014)hereAdditional Disclosures Solicitation Status here<a href="http://ift.tt/1F8wk51 =2&detail=31">Endorsement Policy ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS ANDDISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THISLINK: here. IN ADDITION,RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLEON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS,CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'SCODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATEFIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLEFROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHERPERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES.DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN ANEU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUERON THE FITCH WEBSITE.

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