NEW YORK--(BUSINESS WIRE)-- Fitch Ratings has assigned a 'B+/RR4' rating to HCA, Inc.'s proposed $500 million senior unsecured notes due 2018. Proceeds will be used for general corporate purposes. The Rating Outlook is Stable. A full rating list is shown below. The ratings apply to $25.3 billion of debt outstanding at June 30, 2011.
On Sept. 21, HCA bought back BofA's 15.6% ownership stake in the company for approximately $1.5 billion. Funding of the repurchase of the BofA shares, along with the pending $1.45 billion HealthONE acquisition, is expected to increase HCA's total debt by $3 billion to about $28.3 billion. HCA initially funded the BofA share repurchase through draws on its bank credit revolvers. It has not yet finalized financing plans for the HealthONE acquisition. Fitch projects that total debt-to-EBITDA at the end of 2011 will approach 4.8 times (x), basically unchanged from its Dec. 31, 2010 level. Fitch does expect that leverage will drop to below 4.5x early in 2012 due to EBITDA contributed by the HealthONE acquisition, which is expected to close in 4Q'11.
HCA's ratings reflect the following main credit factors:
--Recent balance sheet improvement through extension of 2012-2013 bank debt maturity wall and paydown of high coupon second lien secured debt.
--Debt repayment is expected to be nominal and further large share repurchases would pressure the ratings if debt is sustained above 4.5x EBITDA.
--Aside from the recent BofA share repurchase, acquisitions are expected to be the top priority for cash deployment.
--Fitch anticipates continued robust cash generation for HCA despite recent weakness in organic operating trends in the for-profit hospital sector.
Recent Balance Sheet Improvement: HCA improved its balance sheet flexibility by extending its 2012-2013 bank debt maturity wall and paying down high coupon debt with IPO proceeds, redeeming about $1.1 billion in second lien secured notes in June 2011. More recently, the company issued $3 billion in 6.5% secured and $2 billion in 7.5% unsecured notes and used the proceeds to redeem substantially the remaining amount of second lien debt. There are still some sizeable near-term maturities in the capital structure, including $1.9 billion of unsecured notes and about $2.7 billion of bank maturities in 2011-2013.
Expect Nominal Further Deleveraging: HCA's June 30, 2011 4.4x total debt leverage level was reduced from 5.0x one year prior, due to a $1.5 billion reduction in total debt outstanding and 2% year-over-year growth in LTM EBITDA. HCA's debt levels are consistent with its publicly traded peers. While FCF generation could support further debt pay down, Fitch does not believe that there is compelling financial incentive for the company to reduce leverage.
Dividends Impacted Cash Generation: HCA's FCF was significantly negative in 2010 due to the payment of $4.3 billion in dividends to the company's private equity owners. Fitch's 2011-2013 operating outlook for HCA, which contemplates low single digit organic top-line growth, and slight contraction of the EBITDA margin, leading to slightly positive EBITDA growth, results in FCF generation of about $1.2 billion annually. There is upside potential to this forecast from acquisitions and government high tech incentive payments.
Economy & Healthcare Reform Headwinds: Organic topline 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 persistent high unemployment and government pricing pressure exacerbated by the implementation of reimbursement reforms. Management cost cutting efforts and low inflation in labor and supplies costs are supporting the industry's profitability.
DEBT ISSUE RATINGS
Fitch has affirmed the following ratings:
--Issuer Default Rating (IDR) at 'B+';
--Senior Secured credit facilities (cash flow and asset backed) at 'BB+/RR1' (100% estimated recovery);
--Senior Secured First lien notes at 'BB+/RR1' (100% estimated recovery);
--Senior Secured Second lien notes at 'BB+/RR1' (100% estimated recovery);
--Senior Unsecured notes at 'B+/RR4' (31%-50% estimated recovery).
HCA Holdings Inc.
--IDR at 'B+';
--Senior Unsecured Notes at '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). Based on LTM June 30, 2011 EBITDA of $5.85 billion and using assumptions of a 40% EBITDA discount and 7.0x multiple, Fitch estimates a distressed enterprise value (EV) of $24.6 billion for HCA.
Fitch applies a waterfall analysis to the distressed EV based on the relative claims of the debt in the capital structure. 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 in the 31%-50% range. The 'B-/RR6' rating on the HCA Holdings, Inc. unsecured notes reflects expectation of 0% recovery.
HCA initially funded the BofA share repurchase through draws on its credit revolvers. At June 30, 2011, the company had $2.9 billion of capacity under the $4 billion in total revolver commitments. Since Fitch assumes that HCA would fully draw its credit revolvers in a distressed scenario, funding of the transaction had no impact on the estimated debt issue recoveries.
Fitch notes that the company has good incremental capacity for additional secured debt issuance. 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. Assuming $5.9 billion in EBITDA, the company has total first lien secured debt capacity of about $22 billion. There is currently $16 billion of secured debt in the capital structure.
GUIDELINES FOR FURTHER RATING ACTIONS
Maintenance of a 'B+' IDR will require debt-to-EBITDA generally maintained between 4.0x and 4.5x. Fitch recognizes that there may be the increased potential for event risk for HCA now that the company has successfully executed on its IPO strategy. The BofA share repurchase is evidence of the company's evolving financial strategy and the potentially large impacts on the capital structure. Debt levels periodically trending above 4.5x EBITDA can be tolerated at the 'B+' rating, depending upon Fitch's assessment of the company's willingness and ability to rapidly reduce debt following a leveraging transaction.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 12, 2011).
Applicable Criteria and Related Research:
Corporate Rating Methodology
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