Fixer-Upper Acquisitions Pose Challenge For Vanguard

Vanguard Health Systems works with more financially troubled hospitals than most of Moody's Investors Service's other rated health facility operators, said Russell Pomerantz, senior analyst. Vanguard's margins are below 10%, whereas most of its peers clear margins above 15%, he said, explaining the added risks of working with initially less profitable hospitals. This is a cause for concern, reflected in the Ba3 rating of the company's new $150 million "B" term loan add-on piece. "That's where the money's at," responded Trip Pilgrim, v.p. of investor relations for Vanguard, commenting on the added risk of working with these troubled hospitals.

The tranche, led by Bank of America, is backing Vanguard's $295 million acquisition of five hospitals from Baptist Health Systems, the company's biggest acquisition thus far. High leverage is also a source of concern, with pro forma multiples as of last September hitting 4.5 times, up from 3.2 times in 2001. The leverage figures also depend on certain synergies and could reach five times without them, Pomerantz added. The company indicated that it will target a ratio of 3.75 times, but Moody's is doubtful that Vanguard will meet this target anytime soon if it does not raise more equity or slow down its acquisition pace. Moody's noted that the company's aggressive growth strategy could also limit its ability to delever. Pomerantz noted, however, that the company has a solid management team. "These guys all have good experience," he said, adding that the company has shown marginal improvement and a good track record in improving facilities. Vanguard also received a substantial equity contribution from its sponsor, Morgan Stanley Capital Partners. Also, Moody's noted that the new facility and the company's existing $125 million revolver, which was upgraded to Ba3, have strong asset coverage provided by a security package. Nashville, Tenn.-based Vanguard had $310 million in debt as of last September.