NEW YORK--(BUSINESS WIRE)--Fitch Ratings does not expect any change to HCA Holdings, Inc.'s (HCA) ratings, including the 'B+' Issuer Default Rating (IDR), due to the repurchase of $500 million of shares from the sponsors of a 2006 leveraged buyout (LBO). The Rating Outlook is Positive. A full rating list is shown below. The ratings apply to $28.2 billion of debt outstanding at June 30, 2013.
HCA plans to fund the share repurchase through draws on the bank credit revolvers, resulting in a less than 0.1x increase in total debt-to-EBITDA. Considering the increase in debt to fund the share repurchase, Fitch projects debt leverage of 4.5x at the end of 2013. The draw on the credit revolvers also does not affect Fitch's recovery analysis for HCA, which is discussed in detail below.
The sponsors of the LBO have been actively liquidating their positions in the company since a March 2011 IPO. Along with the share repurchase, Bain Capital Partners, LLC and Kohlberg Kravis Roberts & Co. will sell 30 million shares to the public in a secondary offering. Prior to the share repurchase and secondary offering, Bain, KKR and the Frist Entities owned a combined 38% of HCA's public equity value. As a result of the transactions, the sponsors' ownership will drop to about 28%.
Under the direction of the LBO sponsors, HCA's ratings were constrained by shareholder-friendly capital deployment; the company funded $7.4 billion in special dividends since 2010 that were mostly debt financed. Due to a drop in the ownership percentage of the sponsors to below 40%, SEC regulations require the company to appoint a majority of independent directors to the Board during 2014; only four of the 14 current Board members are considered independent.
Fitch revised HCA's Rating Outlook to Positive in August 2013, indicating that a one-notch upgrade to 'BB-' is likely in the next 12-18 months. A positive rating action will require HCA to maintain debt at or below 4.5x EBITDA. Although Fitch does not expect a major departure in strategic direction under an independent board, there may be some shifts in the company's capital deployment strategy. A more consistent and conservative approach to funding shareholder pay-outs in the form of special dividends and share repurchases would support an upgrade.
Other factors that would support an upgrade of the ratings include sustained improvement in organic acute care operating trends, better clarity on the effects of the Affordable Care Act (ACA) on operating results and sustained solid cash generation. Fitch forecasts HCA will produce discretionary free cash flow (cash from operations less capital expenditures and distributions to minority interests) of $1.2 billion?$1.3 billion in 2013.
While Fitch currently forecasts revenue and EBITDA growth across the group of for-profit hospital companies in 2014 due to the ACA, estimating the precise effects is complicated by uncertainty over the pace and progress of the growth of the insured population. As the largest operator of acute-care hospitals in the country, with a broad geographic footprint, HCA is well positioned to capture market share if the ACA results in a boost in patient volumes in 2014. The company's organic growth in patient volumes has consistently outpaced that of the broader for-profit hospital industry over the past several years.
Growth in pricing has been relatively weaker, reflecting a persistent shift in HCA's mix of patients to those with less profitable Medicaid coverage, as well as uninsured patients. However, pricing has recently improved. HCA previewed the third quarter 2013 (3Q'13) results earlier this month including decent 3.4% growth in same facility revenue per equivalent admission.
DEBT ISSUE RATINGS AND RECOVERY ANALYSIS
Fitch currently rates HCA as follows:
HCA, Inc.
--IDR 'B+';
--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 unsecured notes 'BB-/RR3' (65% estimated recovery).
HCA Holdings Inc.
--IDR 'B+';
--Senior unsecured notes 'B-/RR6' (0% estimated recovery).
The recovery ratings are based on a financial distress 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 June 30, 2013 LTM EBITDA level of $6.5 billion. A 40% haircut represents roughly the level of EBITDA decline that would result in a 1.1x fixed charge coverage ratio.
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 lower multiples. The 7.0x multiple also considers recent public market multiples for healthcare providers.
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. Fitch assumes that HCA would fully draw the $2 billion available balance on its cash flow revolver and 50% of the $2.5 billion available balance on its asset backed lending (ABL) facility. The availability on the ABL facility is based on eligible accounts receivable as defined per the credit agreement. The 50% assumed draw on the ABL facility reflects Fitch assumption of some degradation in the ABL borrowing base as the company approaches default.
The 'BB+/RR1' rating for HCA's secured debt (which includes the bank credit facilities and the first lien notes) reflects Fitch's expectations for 100% recovery under a bankruptcy scenario. Claims under the ABL facility are assumed to be recovered fully prior to any recovery of the other first-lien debt, including the cash flow revolver, cash flow term loans and first lien secured notes. The 'BB-/RR3' rating on HCA Inc.'s unsecured notes rating reflects Fitch's expectations for recovery in the 51%-70% range. The 'B-/RR6' rating on the HCA Holdings, Inc. unsecured notes reflects expectation of 0% recovery.
HCA's debt agreement permit the company to issue first lien secured debt up to an amount equal to 3.75x EBITDA. At June 30, 2013, Fitch estimates the company had $6.8 billion in first lien capacity. Additional first lien debt issuance would result in lower recovery for the HCA Inc. unsecured note holders.
Under Fitch's current recovery model assumptions, the company could increase its outstanding first lien debt by up to $1.2 billion without diminishing recovery prospects for the HCA Inc. unsecured note holders to below the 'RR3' recovery band of 51%-70%. Should the company increase the amount of secured debt in the capital structure by more than that amount, Fitch would likely downgrade the HCA Inc. unsecured notes by one-notch, to 'B+/RR4'. The ratings on the secured debt and HCA Holdings Inc. unsecured notes would not be affected.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
-- For Profit Hospital Insights: Fitch's Annual Review of Bad Debt Accounting Policies and Practices (Oct. 24, 2013);
--Margin Preservation Strategies: Different Angles (U.S. Hospitals and Health Insurers) (Oct. 1, 2013);
--'Hospitals Credit Diagnosis' (Sept. 27, 2013);
-- Fitch Upgrades HCA Inc.'s Unsecured Debt to 'BB-'; Revises Outlook to Positive (Aug. 22, 2013);
--'The Affordable Care Act and Healthcare Providers: Assessing the Potential Impact' (May 1, 2013);
--'High-Yield Healthcare Checkup' (Jan. 30, 2013);
--'2013 Outlook: U.S. Healthcare' (Nov. 29, 2012);
--'Corporate Rating Methodology' (Aug. 5, 2013).
Applicable Criteria and Related Research:
For-Profit Hospital Insights (Fitch's Annual Review of Bad Debt Accounting Policies and Practices)
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=721280
Margin Preservation Strategies - Different Angles (Credit Implications for U.S. Hospitals and Health Insurers)
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=718975
The Affordable Care Act and Healthcare Providers (Assessing the Potential Impact)
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=706654
High-Yield Healthcare Checkup: Comprehensive Analysis of High-Yield U.S. Healthcare Companies
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=700377
2013 Outlook: U.S. Healthcare -- Navigating a Dynamic Operating and Regulatory Environment
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=695570
Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=715139
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