Fitch Rates HCA's Secured Term Loan and Secured Notes 'BB+/RR1'

NEW YORK--()--Fitch Ratings has assigned 'BB+/RR1' ratings to HCA Inc.'s (HCA) $2 billion secured term loan due 2023 and $1 billion senior secured notes due 2026. The proceeds will be used for general corporate purposes including refinancing upcoming debt maturities. The Rating Outlook is Stable. The ratings apply to $30.5 billion of debt outstanding at Dec. 31, 2015. A full list of ratings 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 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 four independent members to the 11-member board of directors (BOD), bringing the total to seven.

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 thinks 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, acquisitions and share repurchases. At 3.8x, 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 and health insurer scrutiny of hospital care, 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;

--Modest Operating EBITDA margin compression of 20-30 basis points (bps) in each of 2016 and 2017, primarily as the result of negative operating leverage as patient volume growth rates normalize versus the higher level seen in 2014-2015 level and growth in pricing slows;

--Fitch forecasts EBITDA of $8.3 billion and discretionary FCF of $2 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 acquisitions, and debt due in 2016-2018 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 an 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 of 3.0x-3.5x. In addition to a commitment to operate with lower leverage, continuation of the recent improvement in organic operating trends in the hospital industry would support a higher rating for HCA. Evidence of an improved operating trend would include continued 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. Proceeds from the new bank loan will refinance approximately $2 billion of term loans maturing in 2017. There are no other significant maturities in 2016-2017. In 2018, $2.3 billion of term loans and $500 million of unsecured notes come due. Fitch believes that HCA's operating outlook and financial flexibility are amongst the best in the for-profit hospital industry, affording the company good market access to refinance upcoming maturities.

At Dec, 31, 2015, HCA's liquidity included $741 million of cash on hand, $2.2 billion of available capacity on its senior secured credit facilities and latest 12 months (LTM) discretionary FCF of about $1.9 billion. HCA's EBITDA/gross interest expense is solid for the 'BB' rating category at 4.9x 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.

Total debt of approximately $30.5 billion at Dec. 31, 2015 included $8.7 billion of first-lien secured bank debt, $11.1 billion of first-lien secured notes, $9.3 billion of HCA Inc. unsecured notes, and $1 billion of Hold Co. unsecured notes. HCA's bank debt includes approximately $5.6 billion in term loans maturing through June 2020. The company had full availability on its $2 billion capacity cash flow revolving loan and roughly $200 million availability on its $3.25 billion capacity asset-based revolving loan (ABL facility).

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, Inc. that are 'unrestricted subsidiaries' under the HCA Inc. 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. At Dec. 31, 2015, the subsidiary guarantors of the first-lien obligations comprised about 45% of consolidated total assets. 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 Inc. 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 2.4x at Dec. 31, 2015. 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 Inc. 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 Inc. level. At Dec. 31, 2015, leverage at the HCA Inc. and HCA Holdings Inc. level was 3.7x and 3.8x, respectively.

FULL LIST OF RATING ACTIONS

Fitch currently rates HCA as follows:

HCA, Inc.

--IDR 'BB';

--Senior secured credit facilities (cash flow and asset backed) 'BB+/RR1';

--Senior secured first lien notes 'BB+/RR1';

--Senior unsecured notes 'BB/RR4'.

HCA Holdings Inc.

--IDR 'BB';

--Senior unsecured notes 'B+/RR6'.

The Rating Outlook is Stable.

Relevant Committee Date: Sept. 1, 2015.

Additional information is available on www.fitchratings.com

Applicable Criteria

Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 17 Aug 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869362

Additional Disclosures

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Contacts

Fitch Ratings
Primary Analyst
Megan Neuburger, CFA
Managing Director
+1-212-908-0501
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Bob Kirby, CFA
Director
+1-312-368-3147
or
Committee Chairperson
Monica Aggarwal, CFA
Managing Director
+1-212-908-0282
or
Media Relations:
Alyssa Castelli, +1 212-908-0540
alyssa.castelli@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Megan Neuburger, CFA
Managing Director
+1-212-908-0501
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Bob Kirby, CFA
Director
+1-312-368-3147
or
Committee Chairperson
Monica Aggarwal, CFA
Managing Director
+1-212-908-0282
or
Media Relations:
Alyssa Castelli, +1 212-908-0540
alyssa.castelli@fitchratings.com