NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed HCA Holdings Inc.'s (HCA) ratings, including the 'BB' Issuer Default Rating (IDR). The Rating Outlook is Stable. The ratings apply to $31.5 billion of debt outstanding at June 30, 2016. A full list of rating actions follows at the end of this release.
KEY RATING DRIVERS
Industry-Leading Financial Flexibility: 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 hospital industry-leading operating margins and generates consistent and ample discretionary free cash flow (FCF; operating cash flows less capital expenditures and distributions to minority interests).
Transition to Public Ownership Complete: The sponsors of a 2006 LBO previously directed HCA's financial strategy, but their ownership stake decreased steadily following a 2011 IPO and HCA has appointed six independent members to the 11-member board of directors (BOD), bringing the total to eight.
More Predictable Capital Deployment: Under the direction of the LBO sponsors, HCA's ratings were constrained by shareholder-friendly capital deployment; the company has funded $7.5 billion in special dividends and several large repurchases of the sponsors' shares since 2010. Fitch believes HCA will have a more consistent and predictable approach to funding shareholder payouts under public ownership and an independent BOD.
Expect Stable Leverage: Fitch forecasts that HCA will produce discretionary FCF of about $2 billion in 2016, and will prioritize use of cash for organic investment in the business and share repurchases. At 4.1x, HCA's gross debt/EBITDA is below the average of the group of publicly traded hospital companies, and Fitch does not believe that there is a compelling financial incentive for HCA to apply cash to debt reduction.
Secular Headwinds to Operating Outlook: Measured by revenues, HCA is the largest operator of for-profit acute care hospitals in the country, with a broad geographic footprint. The company benefited from this favorable operating profile during a period of several years of weak organic operating trends in the for-profit hospital industry. Although operating trends improved industrywide starting in mid-2014, secular challenges, including a shift to lower-cost care settings driven by health insurer scrutiny of hospital care and increasing healthcare consumerism, are a continuing headwind to organic growth.
KEY ASSUMPTIONS
Fitch's key assumptions within the rating case for HCA include:
--Organic revenue growth of 4%-5% in 2016 and 2017, driven by a 2%-3% increase in patient volumes with the remainder contributed by growth in pricing;
--Operating EBITDA margin compression of about 100 basis points (bps) through the end of 2019, primarily as the result of negative operating leverage as patient volume growth rates slow versus the higher level seen in 2014-2015 and growth in pricing slows;
--Fitch forecasts EBITDA of $8.5 billion and discretionary FCF of $2.0 billion in 2016 for HCA, with capital expenditures of about $2.7 billion. Higher capital spending is related to growth projects that support the expectation of EBITDA growth through the forecast period;
--The majority of discretionary FCF is directed towards share repurchases, and debt due in 2016-2019 is refinanced, resulting in gross debt/EBITDA of 3.5x-4.0x through the forecast period.
RATING SENSITIVITIES
Maintenance of a 'BB' Issuer Default Rating (IDR) considers HCA operating with debt leverage sustained around 4.0x and with a FCF margin of 4%-5%. A downgrade of the IDR to 'BB-' is unlikely in the near term, since these targets afford HCA with significant financial flexibility to increase acquisitions and organic capital investment while still returning a substantial amount of cash to shareholders through share repurchases.
An upgrade to a 'BB+' IDR is possible if HCA maintains debt leverage at 3.5x or below. 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, sustained improvement in the payor mix with fewer uninsured patients and correspondingly lower bad debt expense, and limited concern that profitability will suffer from drops in reimbursement rates.
LIQUIDITY
HCA's liquidity profile is solid. There are no significant debt maturities in 2016-2017. Large maturities include $500 million of HCA Inc. unsecured notes in 2018, $2.1 billion of HCA Inc. secured notes in 2019 and $3.0 billion of ABL revolver borrowings maturing in 2019. Fitch believes that HCA's operating outlook and financial flexibility are amongst the best in the hospital industry, affording the company good market access to refinance upcoming maturities.
At June 30, 2016, HCA's liquidity included $691 million of cash on hand, $2 billion of available capacity on its senior secured credit facilities and latest 12 months (LTM) discretionary FCF of about $2.4 billion. HCA's EBITDA/interest paid is solid for the 'BB' rating category at 4.8x and the company had an ample operating cushion under its bank facility financial maintenance covenant, which requires debt net of cash maintained at or below 6.75x EBITDA.
The secured debt rating is one notch above the IDR, illustrating Fitch's expectation of 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 HCA that are 'unrestricted subsidiaries' under the HCA unsecured note indenture dated Dec. 16, 1993.
Because of restrictions on the guarantor group as stipulated by the 1993 indenture, the credit facilities and first-lien notes are not 100% secured; the subsidiary guarantors of the first-lien obligations comprised about 44% of consolidated total assets at June 30, 2016. The ABL facility has a first-lien interest in substantially all eligible accounts receivable (A/R) of HCA, Inc. and the guarantors, while the other bank debt and first-lien notes have a second-lien interest in certain of the receivables.
The HCA unsecured notes are rated at the same level as the IDR despite the substantial amount of secured debt to which they are subordinated, with secured leverage of about 2.8x. If HCA were to layer more secured debt into the capital structure, such that secured debt leverage is greater than 3.0x, it could result in a downgrade of the rating on the HCA unsecured notes to 'BB-'. The bank agreements include a 3.75x first lien secured leverage ratio debt incurrence test.
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 HCA level. At June 30, 2016, leverage at the HCA and HCA Holdings Inc. level was 4.0x and 4.1x, respectively.
FULL LIST OF RATING ACTIONS
Fitch has affirmed the following ratings:
HCA Inc.
--IDR at 'BB';
--Senior secured credit facilities (cash flow and asset backed) at 'BB+/RR1';
--Senior secured first lien notes at 'BB+/RR1';
--Senior unsecured notes at 'BB/RR4'.
HCA Holdings Inc.
--IDR at 'BB';
--Senior unsecured notes at 'B+/RR6'.
The Rating Outlook is Stable.
Summary of Financial Statement Adjustments - Financial statement adjustments that depart materially from those contained in the published financial statements of the relevant rated entity or obligor are disclosed below:
--Historical and projected EBITDA is adjusted to add back non-cash stock based compensation. In 2015, Fitch added back $239 million in non-cash stock based compensation to the EBITDA calculation.
Additional information is available on www.fitchratings.com
Applicable Criteria
Criteria for Rating Non-Financial Corporates (pub. 27 Sep 2016)
https://www.fitchratings.com/site/re/885629
Additional Disclosures
Dodd-Frank Rating Information Disclosure Form
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https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1013430
Endorsement Policy
https://www.fitchratings.com/regulatory
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