Investing.com -- S&P Global Ratings has upgraded the credit rating of Ardent Health Partners Inc. from ’B’ to ’B+’ due to improved credit metrics. The upgrade follows the company’s successful efforts to reduce debt leverage since its initial public offering in July 2024. The outlook for the company remains stable.

Ardent Health Partners has surpassed expectations by significantly reducing its debt leverage and maintaining solid operating performance. The S&P Global Ratings-adjusted debt to EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) is expected to stay between 3.4x and 4.0x, with discretionary cash flow (DCF) to debt of 4%-6% over the next two years.

The rating of the company’s senior secured debt has also been raised two notches to ’BB-’, with the recovery rating elevated to ’2’. This improvement is attributed to the upgrade in the issuer credit rating and enhanced recovery prospects for the debt. The issue-level rating on the senior unsecured notes has been lifted to ’B-’, while the ’6’ recovery rating remains unchanged.

Ardent Health Partners’ debt leverage in 2024 decreased to 3.5x from 4.9x in 2023, exceeding the prior expectation of 4x. The company’s revenue grew by 10.3%, driven by a 4.8% increase in adjusted admissions and a 5.1% increase in net patient service revenue per adjusted admission. The company also gained a net benefit to pretax income of $98 million under both the Oklahoma Directed Payment Program (OK DPP) and the New Mexico DPP (NM DPP). The S&P Global Ratings-adjusted EBITDA margin in 2024 increased to 11% from 9% due to lower usage and price of contract labor and expanded capacity for higher acuity procedures.

The company’s future performance is expected to maintain its S&P Global Ratings-adjusted leverage at 3.4x-4.0x and drive DCF to debt of 4%-6%. This projection is based on a 2025 base case that includes 4% revenue growth, supported by 2%-3% adjusted admission growth and some rate increases. Organic growth is anticipated to be supported by further growth in outpatient capacity in existing markets, including urgent care centers, freestanding emergency departments, and potentially ambulatory surgery centers.

However, there is some uncertainty around proposed Medicaid policy changes and how they might affect Ardent. Republicans in Congress are looking to extend expiring tax cuts and modify federal spending on programs like Medicaid. The House is seeking $2.3 trillion in deficits with significant Medicaid cuts, while the Senate is targeting $5.8 trillion without clear implications for Medicaid.

Despite these uncertainties, Ardent Health Partners is expected to continue its strong financial performance. The company’s financial policy is anticipated to support its S&P Global Ratings-adjusted leverage profile of 3.4x-4.0x. The company’s leverage could temporarily rise up to 4.5x for attractive merger and acquisition opportunities, but it is expected to decline to 4x or below in the subsequent one to two years. This prediction is based on the company’s solid cash flow generation and its history of successful integration of acquired companies.

The stable outlook reflects expectations that Ardent’s S&P Global Ratings-adjusted debt leverage will remain below 5x, specifically 3.4x-4.0x, with the potential for a temporary increase for attractive M&A opportunities. The company’s strong financial performance, solid patient admission trends, chronic reimbursement risk, and effective cost management strategies are expected to result in an S&P Global Ratings-adjusted EBITDA margin of about 10%-11%.

A lower rating could be given to Ardent if its S&P Global Ratings-adjusted debt to EBITDA trends above 5x or DCF to debt falls below 5%. Conversely, a rating increase could occur if the company demonstrates its commitment to keeping its S&P Global Ratings-adjusted debt to EBITDA below 3x and improves its scale, geographic concentration, and diversification into different business segments.

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