KEY RATING DRIVERS
--HCA's financial flexibility has improved significantly in recent years as a result of organic growth in the business as well as proactive management of the capital structure. The company has industry leading operating margins and generates consistent and ample discretionary FCF (CFO less capital expenditures and distributions to minority interests).
--The sponsors of a 2006 LBO have directed HCA's financial strategy for the last several years, but their ownership has been steadily decreasing since a 2011 IPO and HCA recently appointed four new independent members to the 13-member board, bringing the total to seven.
--Under the direction of the LBO sponsors, HCA's ratings were constrained by shareholder-friendly capital deployment; the company funded
--Fitch forecasts that HCA will produce discretionary FCF of
--HCA's organic growth in patient volumes has outpaced that of the broader for-profit hospital industry over the past several years. As one of largest operators of acute care hospitals in the country, with a broad geographic footprint, HCA is well-positioned to capture market share if patient volumes rebound in 2014-2015.
SOLID FINANCIAL FLEXIBILITY
HCA's balance sheet flexibility has recently improved due to the extension of some near-term debt maturities, the refinancing of relatively high coupon secured notes, and a reduction in pricing on a cumulative
Internal sources of liquidity could also address upcoming debt maturities. At
Fitch's 2014 operating forecast for HCA projects the company generating
EVOLVING CAPITAL DEPLOYMENT STRATEGY
The sponsors of a 2006 LBO directed HCA's financial strategy for the last several years. Following a series of public equity offerings and share buybacks, the sponsors' ownership percentage dropped below 30% and
With the 2014 implementation of the health insurance coverage expansion elements of the Affordable Care Act (ACA) encouraging scale and consolidation in the hospital industry, Fitch believes HCA is now more likely to prioritize acquisitions and capital investment as a use of cash as opposed to debt reduction or payments to shareholders. The company's recent acquisitions have been small though; the last large transaction was in late 2011 when HCA acquired the 40% remaining ownership interest in the
HCA could increase debt to fund further dividends to shareholders or acquisitions. The debt agreements do not significantly limit the ability to issue additional debt. The bank agreements include a 3.75x first lien secured leverage ratio debt incurrence test and a 6.75x net debt-to-EBITDA financial maintenance covenant. At
A recent amendment to the bank agreement loosened the limit on restricted payments (RP), including dividends and share repurchases, allowing unlimited RPs as long as total debt at the
HOSPITAL INDUSTRY OPERATING TRENDS IMRPROVING, ACA A BOOST, SECULAR HEADWINDS INTACT
The benefits of HCA's favorable business profile, with excellent scale and decent geographic diversification, are evident in recent operating trends, although the company has not been entirely resilient to headwinds to organic growth in the hospital sector. Facing a stiff comparison to a strong result in 2012 and weak growth in lower acuity service lines, HCA's organic patient volumes growth in 2013 was markedly softer than in recent periods, with same hospital adjusted admissions growing 0.1%. This weak volume metric still outperformed the peer group; same hospital adjusted admissions across the Fitch-rated group of for-profit hospital providers dropped 0.7% on average in 2013.
Operating trends were similarly weak in Q1'14, then improved drastically in Q2'14, with most companies reporting better organic volume growth, an improved payor mix with lower volumes of insured patients, and a higher acuity case mix, which is supportive of pricing growth and profitability. HCA reported organic volume growth of 2.2%. Drivers of the improved trend include general economic improvement in most geographies, the early influence of the insurance expansion elements of the ACA, as well as an ongoing skew toward a more acute (sicker) patient population. Fitch thinks that management initiatives to create growth in more profitable areas, including targeted expansion in outpatient services and more acute service lines, were also a factor.
Growth in profitability in the quarter illustrated the power of operating leverage for the hospital industry. Along with the generally improved operating trends, profitability increased for most for-profit hospital companies in Q2'14 versus the year ago period. Excluding supplemental
Maintenance of a 'BB-' IDR contemplates HCA operating with total debt-to-EBITDA below 4.5x, and with a FCF-margin of 4% or higher. A downgrade of the IDR to 'B+' is unlikely in the near term, since these targets afford HCA with significant financial flexibility to increase acquisitions and organic capital investment, which Fitch thinks will be the priorities for capital deployment going forward.
An upgrade to a 'BB' IDR contemplates HCA maintaining debt leverage below 4.0x. In addition to a commitment to operate with lower leverage, improvement in organic operating trends in the hospital industry would support a higher rating for HCA. Evidence of an improved operating trend would include sustained positive growth in organic patient volumes, improvement in the payor mix with fewer numbers of uninsured patients and correspondingly lower bad debt expense, and limited concern that profitability will suffer from drops in reimbursement rates.
DEBT ISSUE RATINGS
Fitch has taken the following rating actions:
--IDR upgraded to 'BB-' from 'B+';
--Senior secured credit facilities (cash flow and asset backed) affirmed at 'BB+' (previously 'BB+/RR1', recovery ratings only apply for entities rated 'B+' and below);
--Senior secured first lien notes affirmed at 'BB+' (previously 'BB+/RR1);
--Senior unsecured notes affirmed at 'BB-' (previously 'BB-/RR3') .
HCA Holdings Inc.
--IDR upgraded to 'BB-' from 'B+';
--Senior unsecured notes upgraded to 'B' from 'B-/RR6'.
Total debt at
The secured debt rating is two notches above the IDR, illustrating Fitch's expectation for superior recovery prospects in the event of default. The first-lien obligations, including the bank debt and the first-lien secured notes, are guaranteed by all material wholly owned U.S. subsidiaries of
The HCA Holdings Inc. unsecured notes are rated two-notches below the IDR to reflect the substantial structural subordination of these obligations, which are subordinate in right of payment to all debt outstanding at the
Additional information is available at 'www.fitchratings.com'.
--'U.S. Healthcare Stats Quarterly (First-Quarter 2014)' (
--'Hospitals Credit Diagnosis' (
--'High-Yield Healthcare Checkup' (
--'U.S. Leveraged Finance Spotlight Series: HCA Holdings, Inc.' (
--'For-Profit Hospital Insights: Fitch's Annual Review of Bad Debt Accounting Policies and Practices' (
--'Margin Preservation Strategies: Different Angles (U.S. Hospitals and Health Insurers)' (
--'The Affordable Care Act and Healthcare Providers: Assessing the Potential Impact' (
--'Corporate Rating Methodology' (
Source: Fitch Ratings
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