June 8, 2017 / 2:36 PM / 7 months ago

Fitch Rates HCA's Senior Secured Notes 'BB+/RR1'

(The following statement was released by the rating agency) NEW YORK, June 08 (Fitch) Fitch Ratings has assigned a 'BB+/RR1' rating to HCA Inc.'s (HCA) proposed senior secured notes issuance. Proceeds will be used to fund planned acquisitions and for general corporate purposes. The Rating Outlook is Stable. The ratings apply to $31.7 billion of debt outstanding at March 31, 2017. A full list of ratings follows at the end of this release. KEY RATING DRIVERS HCA's 'BB' rating reflects: Industry-Leading Financial Flexibility: HCA has hospital industry-leading operating margins and generates consistent and ample discretionary FCF (operating cash flows less capex). 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. Expect Stable Leverage: Fitch forecasts that HCA will produce cash flow from operations (CFO) of about $4.8 billion in 2017, and will prioritize use of cash for M&A, organic investment in the business, and share repurchases. At 4x, HCA's leverage 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 use cash for debt reduction. Secular Headwinds Driving 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 during a period of several years of weak organic operating trends in the for-profit hospital industry. Although industry operating trends have improved since mid-2014, secular challenges, including a shift to lower-cost care driven by health insurer scrutiny and increasing healthcare consumerism, are a continuing headwind to organic growth. More Predictable Capital Deployment: The sponsors of a 2006 LBO previously directed HCA's financial strategy, but their ownership stake decreased steadily following a 2011 IPO. Under the direction of the LBO sponsors, HCA's ratings were constrained by shareholder-friendly capital deployment; HCA has so far had a more consistent and predictable approach to funding shareholder payouts under public ownership and an independent board of directors. Uncertain Future of the Affordable Care Act: A common aspect of the various changes to the ACA so far proposed by Republicans is that the new policies would reduce access to and affordability of health insurance for individuals who rely on either the individual health insurance market or state Medicaid programs for coverage. Any policy that rolls back insurance coverage will result in a weaker payor mix for acute care hospitals and this would pressure margins unless offset by cost-saving measures or higher reimbursement. KEY ASSUMPTIONS Fitch's key assumptions within the rating case for HCA include: --Organic revenue growth of 4% in 2017 and 2018, driven by a 2%-3% increase in patient volumes with the remainder contributed by growth in pricing; --Operating EBITDA margin compression of about 80bps through the end of 2018, 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 before dividends to associates and minorities of $8.7 billion and discretionary FCF of $1.7 billion in 2017 for HCA, with capital expenditures of about $3 billion. Higher capital spending is related to growth projects that support the expectation of EBITDA growth through the forecast period; --Debt due in 2017-2019 is refinanced, resulting in gross debt/EBITDA after dividends to associates and minorities maintained near 4x through the forecast period. RATING SENSITIVITIES The 'BB' Issuer Default Rating (IDR) considers HCA operating with leverage (total debt/EBITDA after associate and minority dividends) around 4x and with a discretionary 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. An upgrade to a 'BB+' IDR is possible if HCA maintains 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, improvement in the payor mix with fewer uninsured patients and correspondingly lower bad-debt expense. LIQUIDITY HCA's liquidity profile is solid. There are no significant debt maturities in 2017. Large maturities include $500 million of HCA Inc. unsecured notes in 2018, $2.1 billion of HCA Inc. secured notes in 2019 and $3.1 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 March 31, 2017, HCA's liquidity included $753 million of cash on hand, $2.1 billion of available capacity on its senior secured credit facilities and latest 12 months (LTM) discretionary FCF of about $2.2 billion. HCA's EBITDA/ interest paid is solid for the 'BB' rating category at 4.6x 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. HCA's secured debt rating is rated 'BB+/RR1', one notch above the IDR, illustrating Fitch's expectation of superior recovery prospects in the event of default. The first-lien obligations, which include the bank terms loans, revolving credit facilities 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. The HCA Inc. unsecured notes are rated 'BB/RR4', the same level as the IDR, despite the substantial amount of secured debt to which they are subordinated, with secured leverage of 2.7x at March 31, 2017. The bank agreements include a 3.75x first-lien secured leverage ratio debt incurrence test. The HCA Holdings Inc. unsecured notes are rated 'B+/RR6', 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 March 31, 2017, leverage at the HCA Inc. and HCA Holdings Inc. level was 3.9x and 4.0x, 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 Healthcare, Inc. --IDR 'BB'; --Senior unsecured notes 'B+/RR6'. The Rating Outlook is Stable. Contact: Primary Analyst Megan Neuburger, CFA Managing Director +1-212-908-0501 Fitch Ratings, Inc. 33 Whitehall Street New York, NY 10004 Secondary Analyst Britton Costa, CFA Senior Director +1-212-908-0524 Committee Chairperson Jack Kranefuss Senior Director +1-212-908-0791 Media Relations: Alyssa Castelli, New York, Tel: +1 (212) 908 0540, Email: alyssa.castelli@fitchratings.com. Relevant Committee Date: Oct. 19, 2016. 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. 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