Fitch Assigns 'BB+/RR1' Rating to HCA's Proposed Senior Secured Notes
NEW YORK -- October 16, 2012
Fitch Ratings has assigned the following ratings to HCA Inc.'s (HCA) $2
billion proposed note issuances:
--$1 billion proposed senior secured notes, 'BB+/RR1';
--$1 billion proposed senior unsecured notes, 'B+/RR4'.
A full list of HCA's ratings is shown below. The Rating Outlook is Stable. The
ratings apply to $27 billion of debt outstanding at June 30, 2012.
Fitch expects that the company will apply the proceeds of the proposed notes
for general corporate purposes, potentially including reducing its 2013 bank
term loan maturity as well as funding an approximately $1.2 billion special
dividend to shareholders in the fourth quarter of 2012 (Q4'12).
HCA's ratings reflect the following main credit factors:
--The company has ample headroom in its credit metrics at the 'B+' rating
category. Fitch forecasts total debt-to-EBITDA of 4.4x and EBITDA-to-gross
interest expense of 3.6x at the end of 2012; total debt-to-EBITDA above 5.0x
could result in a downgrade of the ratings.
--HCA's financial flexibility has improved following the extension of the bulk
of the 2012-2013 debt maturity wall and refinancing of high coupon second lien
secured debt at lower rates.
--Fitch expects continued robust discretionary free cash flow (FCF; cash from
operations less capital expenditures and distributions to minority interests)
of above $1.4 billion annually for HCA in 2012-2013.
--While strong cash generation could support debt pay down, Fitch does not
believe that there is compelling financial incentive for the company to apply
cash to debt reduction.
--HCA's debt agreements do not significantly limit the company's ability to
undertake leveraging transactions, and the ratings are constrained by the
prospect for debt funding of additional shareholder dividends and share
repurchases. A demonstrated commitment to maintaining debt below 4.5x EBITDA
over the next 12-18 months could support a positive rating action.
SOLID FINANCIAL FLEXIBILTY
HCA's liquidity profile is basically solid following the extension of the bulk
of the company's 2012-2013 debt maturities and the refinancing of its
relatively high coupon second lien secured debt at lower rates. At June 30,
2012, near-term maturities in the capital structure include $1.5 billion of
unsecured notes and approximately $1.6 billion of bank term loan maturities in
2012-2013. Fitch expects that HCA will apply proceeds of the proposed senior
secured notes to reduce its 2013 bank term loan maturities, leaving the
company with a still sizeable but manageable maturity schedule in 2012-2013.
Financial flexibility adequate to address the remaining 2012-2013 maturities
is provided by ample sources of liquidity and solid demonstrated capital
market access. At June 30, 2012, HCA's liquidity included $518 million of cash
on hand, $3.1 billion of capacity on its bank facility revolving loans and
latest 12 month (LTM) FCF (cash from operations less capital expenditures,
dividends and distributions) of about 1.5 billion. HCA's LTM EBITDA-to-gross
interest expense was solid for the 'B+' rating category at 3.5x and the
company had about a 40% EBITDA cushion under its bank facility financial
maintenance covenant, which requires debt net of cash maintained below 6.75x
CASH GENERATION OUTLOOK
Fitch's 2012-2013 operating forecast for HCA projects the company generating
$3.7 billion-$3.8 billion in cash from operations (CFO) and $1.4 billion-$1.5
billion in FCF before dividends, assuming capital expenditures of about $1.8
billion and minority distributions of about $420 million. Excluding a 1Q'12
$982 million special dividend payment, FCF before dividends would have been
nearly $2.5 billion in the LTM period ended June 30, 2012.
Versus the $2.5 billion of pre-dividend FCF generated in the LTM, Fitch's more
conservative forecast is driven primarily by higher capital expenditures and
cash taxes. In 2011, FCF was boosted by a favorable $800 million swing in cash
tax payments versus 2010, mostly due to tax refunds related to settlements
that are not expected to reoccur. Also, CFO was boosted by $270 million in
2Q'12 as a result of a settlement from the federal government related to
historical Medicare payment rates. CFO was higher than normal across the
hospital industry in the first half of 2012 as a result of these one-time
Fitch forecasts capital expenditures of $1.8 billion-$1.9 billion for HCA in
2012-2013, up from $1.67 billion in 2011. A higher level of capital
expenditures is anticipated across the for-profit hospital industry in 2012.
The anticipated increase in spending by the industry is driven by the
construction of new and replacement hospitals, maintenance items at recently
acquired hospitals and spending to implement electronic health records
AGGRESSIVE CAPITAL DEPLOYMENT COULD CONSTRAIN RATINGS
Pro forma for the $2 billion proposed notes issuance and assuming half of the
proceeds are applied to refinance outstanding debt, Fitch forecasts year end
2012 total debt-to-EBITDA of 4.4x for HCA. At this level, HCA's debt leverage
is basically consistent with its peer companies. While FCF generation could
support debt pay down, Fitch does not believe that there is compelling
financial incentive for the company to significantly reduce its debt balances,
so it expects that any further leverage reduction will come from incremental
growth in EBITDA. Fitch's near-term (through 2013) operating outlook for HCA
does incorporate modestly positive growth in EBITDA.
Assuming that the company funds a $1.25 billion dividend in 4Q'12, HCA will
have paid out a cumulative $6.525 billion in dividend payments to the
company's owners since early 2010. As evidenced by the proposed notes
issuance, which is anticipated to increase debt in the capital structure,
there is the potential for debt to trend higher in the near term as the result
of funding of additional dividends or share repurchases.
HCA's debt agreements provide significant capacity for additional dividend
payments and share repurchases. Although Fitch expects that a $1.25 billion
dividend payment would consume most of the currently available capacity for
restricted payments under the bank agreement covenants, additional capacity
will build quickly based on 50% of net income. A commitment to maintaining
debt below 4.5x EBITDA over the next 12-18 months despite ongoing shareholder
friendly cash deployment could support an upgrade of the IDR to 'BB-'.
HOSPITAL INDUSTRY OPERATING OUTLOOK
Organic top-line trends in the for-profit hospital sector have recently been
weak, and Fitch does not see a near-term catalyst for improvement. The most
important drivers of the trend are high unemployment and government pricing
pressure, exacerbated by the implementation of Medicare payment reforms
required by the Affordable Care Act (ACA). Management's cost-cutting efforts
and low inflation in labor and supply costs are supporting the industry's
HCA's organic patient volume trends were stronger than that of the broader
for-profit hospital sector in 2011 and the first half of 2012. However, a
shift to patients with less profitable government health insurance coverage
has recently been a headwind to the company's topline growth and
profitability. Fitch's near-term (through 2013) operating outlook for HCA
incorporates modest positive growth in EBITDA despite a slightly lower level
of profitability caused by continued mix shift to less profitable Medicaid and
uninsured patient volumes. Fitch expects low-to-mid single digit organic
topline growth for HCA in the near term. This is mostly contributed through
growth in patient volume since pricing is expected to continue to be strained.
Fitch projects a positive benefit to the hospital industry's revenue, EBITDA
and FCF from the implementation of the ACA in 2014-2015. The initial benefits
to the industry are the result of the health insurance coverage expansion
elements of the ACA. An increase in the number of individuals with health
insurance will lead to a reduced level of uncompensated care and associated
bad debt expense for hospital providers, as well as an increase in the organic
volume of patients. The positive boost to financial trends is likely to erode
over time as hospital providers experience lower payment rates from both
government and commercial insurers in the subsequent years.
DEBT ISSUE RATINGS AND RECOVERY ANALYSIS
Fitch currently rates HCA as follows:
--Senior secured credit facilities (cash flow and asset backed) 'BB+/RR1'
(100% estimated recovery);
--Senior secured first lien notes 'BB+/RR1' (100% estimated recovery);
--Senior secured second lien notes 'BB+/RR1' (100% estimated recovery);
--Senior unsecured notes 'B+/RR4' (40% estimated recovery).
HCA Holdings Inc.
--Senior unsecured notes 'B-/RR6' (0% estimated recovery).
The debt issue ratings are based on a distressed recovery scenario which
assumes that value for HCA's creditors will be maximized as a going concern
(rather than a liquidation scenario). Fitch estimates a post-default EBITDA
for HCA of $3.9 billion, which is a 40% haircut from the LTM EBITDA level of
$6.5 billion. A 40% haircut represents roughly the level of EBITDA decline
that would trip the 6.75x net leverage bank facility financial maintenance
Fitch then applies a 7.0x multiple to post-default EBITDA, resulting in a
post-default EV of $27.2 billion for HCA. The multiple is based on observation
of both recent transactions/takeout and public market multiples in the
healthcare industry. Fitch significantly haircuts the transaction/takeout
multiple assigned to healthcare providers since transactions in this part of
the healthcare industry tend to command multiples of closer to 7.0x versus the
9.74x healthcare sector transaction multiple 10-year low.
Fitch applies a waterfall analysis to the post-default EV based on the
relative claims of the debt in the capital structure. Administrative claims
are assumed to consume $2.7 billion or 10% of post-default EV, which is a
standard assumption in Fitch's recovery analysis. Also standard in its
analysis, Fitch assumes that HCA would fully draw the $4.5 billion available
balance on its bank facility revolvers in a bankruptcy scenario and includes
that amount in the claims waterfall.
The 'BB+/RR1' rating for HCA's secured debt (which includes the bank credit
facilities, the first and second lien notes) reflects Fitch's expectations for
100% recovery under a bankruptcy scenario. The 'B+/RR4' rating on the HCA Inc.
unsecured notes rating reflects Fitch's expectations for recovery of 40% and
the 'B-/RR6' rating on the HCA Holdings, Inc. unsecured notes reflects
expectation of 0% recovery.
The debt issue ratings are sensitive to the amount and relative ranking of the
debt in the capital structure. The current ratings assume that the proposed
notes issuance includes $1 billion each of secured notes and HCA Inc.
unsecured notes and that the proceeds of the secured notes are applied to
reduce the amount of bank debt outstanding. Fitch could adjust the debt issue
ratings if the size and use of proceeds of the proposed notes deviates from
these pro forma expectations.
If HCA elects to upsize the amount of secured debt in the capital structure
through the proposed note issuance, it could result in a downgrade of the HCA
Inc. unsecured notes because of diminished recovery prospects for those
holders. Assuming $1 billion of HCA Inc. unsecured notes are added to the
capital structure through the proposed notes issuance, there is capacity to
add up to $800 million in additional secured debt without diminishing recovery
prospects for the HCA Inc. unsecured note holders to below the 'RR4' recovery
band of 31%-50%, causing a downgrade of the HCA Inc. unsecured notes by
one-notch, to 'B/RR5'. The ratings on the secured debt and the HCA Holdings
Inc. unsecured notes would not be affected.
HCA has good incremental capacity for additional secured debt issuance under
its debt agreements. The only limit on secured debt is a 3.75x first lien
leverage ratio test in the bank agreements. First lien debt includes the bank
debt and the first lien secured notes. At June 30, 2012, total first lien debt
equaled $17.4 billion and 2.7x debt-to-EBITDA. Based on $6.5 billion in LTM
EBITDA, Fitch estimates total first lien secured debt capacity of $24.3
billion, implying additional first lien capacity under the bank agreement
covenant of about $6.9 billion.
WHAT COULD TRIGGER A RATING ACTION
An upgrade of the IDR to 'BB-' would be supported by total debt maintained
below 4.5x EBITDA and interest coverage above 3.5x EBITDA over the next 12-18
months. Drivers of a positive rating action would include a commitment to
maintenance of credit metrics at these levels despite the company's recently
shareholder friendly capital deployment activities.
A downgrade of the IDR could result from debt above 5.0x EBITDA and interest
coverage below 3.0x EBITDA. This could result from a combination of a stressed
operating scenario and aggressive capital deployment. Fitch sees the most
likely drivers of a stressed operating scenario for HCA as continued weakness
in payments. This could be the result of ongoing strained state Medicaid
funding in its largest states (about half of revenues come from its 75
hospitals in Texas and Florida) coupled with persistent shift in its mix of
patients to those with less profitable Medicaid coverage as well as uninsured
Additional information is available at 'www.fitchratings.com'. The ratings
above were solicited by, or on behalf of, the issuer, and therefore, Fitch has
been compensated for the provision of the ratings.
Applicable Criteria and Related Research:
--'Hospitals Credit Diagnosis' (Sept. 18, 2012);
--'Corporate Rating Methodology' (Aug. 8, 2012);
--'Fitch 50 - Structural Profiles of Fifty Leveraged Credits' (July 26, 2012)
--'For-Profit Hospital Quarterly Diagnosis - First Quarter 2012' (June 6,
--'Leverage Finance Annual Manual for the Americas' (May 1, 2012);
--'2012 Outlook: U.S. Healthcare' (Dec. 7, 2011);
--'HCA, Inc. Spotlight Series' (Oct. 11, 2011).
Applicable Criteria and Related Research:
Hospitals Credit Diagnosis: Operating Trends Remain Weak but Solid Liquidity
Supports Credit Profiles
Corporate Rating Methodology
Fitch 50 -- Structural Profiles of 50 Leveraged Credits - Amended
For-Profit Hospital Quarterly Diagnosis
Leveraged Finance Annual Manual for the Americas
2012 Outlook: U.S. Healthcare -- Accelerating Regulatory and Fiscal Challenges
U.S. Leveraged Finance Spotlight -- HCA, Inc.
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