Ratings

Standard & Poor's believes the most likely path to default would involve significant reimbursement issues that might include a reduction in Medicare reimbursement, adverse rate changes in managed care contracts, or the loss of key contracts because of local market competition. Our simulated default scenario contemplates:

• Operating margin erosion that challenges the borrower's ability to meet its debt service requirements;
• A fully drawn revolving credit facility;
• A 200-basis-point increase in LIBOR because of rising interest rates; and
• An additional 200-basis-point increase in the borrower's cost of capital due to credit deterioration.

In evaluating recovery prospects associated with the underlying collateral, Standard & Poor's used an enterprise asset methodology, as the company would likely retain greater value as an ongoing entity in the event of default due to the important services it provides to the communities in which it operates. The hospital industry is very competitive, with uncertain reimbursement rates. As a hospital service provider, IASIS's value is important due to its integral relationships with its physicians and customers, as well as its ability to deliver high-quality service. However, one of the uncertainties to any valuation is the potential for litigation by the government. Consequently, we used the enterprise value methodology to gauge recovery prospects, employing a distressed EBITDA multiple of 6x. Our calculated valuation excludes IASIS's health plan, Health Choice, because it cannot be pledged. Incremental facilities of up to $400 million are not considered in this evaluation because they are not committed.

Using the 6x multiple under our simulated default scenario, we expect meaningful (80%-100%) recovery of principal for secured lenders.