Fitch Affirms HCA’s IDR at ‘B’; Rates Proposed $1.5B HCA Holdings Inc. Notes ‘CC/RR6’

NEW YORK--(BUSINESS WIRE)-- Fitch Ratings has affirmed the ratings of HCA Inc. (HCA) as follows:

--Issuer Default Rating (IDR) at 'B';

--Secured bank credit facility at 'BB/RR1';

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

--Senior secured second lien notes at 'BB-/RR2';

--Senior unsecured notes at 'CCC/RR6'.

HCA plans to create a holding company structure. The newly created holding company, to be called HCA Holdings Inc. (Hold Co.), will be issuing a proposed $1.525 billion of senior unsecured notes due 2021 to fund a portion of an approximate $2 billion distribution to shareholders to be made in the fourth quarter of 2010 (4Q'10). Pending regulatory approvals of a corporate reorganization plan, HCA will become a wholly owned subsidiary of Hold Co. All relevant operations will be housed at HCA and the Hold Co. senior notes are anticipated to be structurally subordinated to all existing and future debt of HCA in right of payment.

Fitch is assigning ratings to Hold Co. as follows:

--IDR 'B';

--Proposed senior unsecured notes 'CC/RR6'.

The ratings apply to approximately $26.1 billion of debt outstanding at Sept 30, 2010. The Rating Outlook is Positive.

HCA's ratings reflect the following factors:

POSITIVE CREDIT MOMENTUM RELATED TO PLANNED IPO, BUT TIMING IS UNCERTAIN:

The Rating Outlook is Positive on the basis of recent improvement in HCA's operating and credit metrics, as well as the potential for significant debt reduction using proceeds from the company's planned initial public offering (IPO). HCA's May 7, 2010 filing for an IPO of up to $4.6 billion and the company's planned use of $2.5 billion of the proceeds for debt reduction support Fitch's expectation that HCA will operate with lower debt leverage as a publicly traded company. A ratings upgrade of one-to-two notches to the 'B+' or 'BB-' IDR level is likely if the company is able to successfully execute on its IPO strategy and proceeds are applied to debt reduction as planned. Based on its pro forma analysis of a post IPO capital structure, Fitch believes the company could achieve post IPO debt leverage of between 3.5 times (x) and 4.0x, versus the Sept. 30, 2010 4.7x level. The timing of the execution of the IPO has become increasingly uncertain, but HCA's credit profile has positive momentum otherwise, as reflected in improvement in operating and credit metrics since the 2006 leveraged buyout (LBO), but particularly over the past 12-18 months. Even if the company's IPO strategy is not executed in the intermediate term, there is the potential for a one-notch upgrade for the IDR in the next 12-24 months assuming continuation of a mildly positive operating trend.

DEBT LEVELS REMAIN HIGH FROM THE LBO, BUT STABLE INDUSTRY OPERATING TRENDS ARE SUPPORTING LOWER DEBT LEVERAGE:

HCA's operating results have been fairly strong since the 2006 LBO. Despite the fact that the company did not undertake a significant organizational restructuring post the LBO, Fitch calculates that EBITDA has expanded by more than 25% or $1.2 billion, to about $5.5 billion for the latest 12 months (LTM) period ended Sept. 30, 2010, from about $4.3 billion in 2006. Annual top line revenue growth of 4%-6% has tracked the broader for-profit hospital industry, and EBITDA growth has also been supported by enhanced profitability as the EBITDA margin expanded by about 140 basis points (bp) since 2006 to an industry leading 18% at Sept. 30, 2010. Fitch calculates that debt equaled about 4.7x LTM EBITDA at Sept. 30, 2010, versus 6.6x immediately post the LBO. The reduction in debt leverage has been the combined result of expansion in EBITDA and a $2.3 billion reduction in the debt balance to $26.1 billion versus $28.4 billion post the LBO.

Fitch's base case operating outlook for HCA contemplates low single digit top-line revenue growth, and slight expansion of the EBITDA margin, leading to nominal but steady EBITDA growth in the intermediate term. These expectations are in-line with Fitch's near-term stable operating outlook for the for-profit hospital industry. Fitch believes that the most important driver of the sector's near-term operating outlook is the pace and progress of economic recovery. Poor macroeconomic conditions are creating significant headwinds for patient utilization and therefore top-line revenue trends in the acute-care hospital industry. However, Fitch expects certain offsets which are stabilizing revenue trends and supporting the industry's recently improved profitability to persist in the intermediate term. Some of these factors include a low inflationary environment with respect to controllable operating costs, strong commercial insurance pricing trends, and a seemingly declining rate of acceleration in levels of uncompensated care. Furthermore, Fitch believes the industry is well positioned to weather scheduled cuts to Medicare reimbursement in the early going of the implementation of healthcare reform due to a strong focus on cost containment and operational efficiency during the economic recession.

MOST SIGNIFICANT RISK TO THE CREDIT PROFILE IS DEBT MATURITY SCHEDULE; LIQUIDITY IS OTHERWISE SOLID:

HCA has the most concerning debt maturity structure amongst the Fitch rated for-profit hospital provider universe; the company has $7.5 billion of bank debt coming due in 2011-2013. HCA has recently taken action to reduce its near-term maturity schedule. Between February 2009 and March 2010, HCA accessed the high yield bond market on four separate occasions, issuing an aggregate $310 million second lien notes and $4.2 billion first lien notes and applying the proceeds to reduce borrowings under the bank facility term loans due 2012 and 2013. In April 2010, the company entered into an amend-and-extend agreement with its bank lenders to extend maturity of $2 billion of its $5.5 billion term loan B to March 2017 from November 2013 in exchange for a 100 bp increase in pricing. Credit risk related to the company's inability to organically address its upcoming maturities is offset by its recently demonstrated strong debt capital market access. For example, the company's most recent note issuance in March 2010 was oversubscribed and upsized to $1.4 billion from $1 billion.

At Sept 30, 2010, HCA's solid liquidity was provided by about $2.2 billion of availability on the company's bank credit facilities and $377 million of cash on hand. HCA generated $1.4 billion of free cash flow (FCF; calculated as cash from operations less dividends and capital expenditure) in 2009, representing a strong for the industry 4.8% FCF margin, and up significantly from the 2008 level of $390 million. HCA has been successful in converting its recent growth in EBITDA into improved cash flow, and a reduced level of capital expenditure has also supported the positive trend. In the first nine months of 2010, HCA generated FCF of ($500) million, which was significantly impacted by special dividend payments to the company's private equity owners. Fitch believes full year 2010 FCF will be negative on the basis of the dividend payments, but in 2011 expects FCF to rebound to above $1 billion on the basis of a mildly positive operating outlook.

Through Sept. 30, 2010, the company's private equity owners have monetized $2.3 billion of their initial $4.7 billion equity investment through the LBO; taking dividend payments of $1.8 billion and $500 million in February and May of 2010. The dividend payments were funded through draws on the bank facility, somewhat undoing HCA's recent progress in addressing the bank maturity cliff. The planned $2 billion 4Q'10 distribution is also anticipated to be entirely debt funded through a combination of draws on the HCA credit facilities and the proposed Hold Co notes. Pro forma for the debt funding of the 4Q'10 distribution, Fitch calculates debt-to-EBITDA of about 5.1x.

As of Sept. 30, 2010, bond maturities through 2014 include: approximately $190 million maturing in 2010, $273 million maturing in 2011, $900 million maturing in 2012, $1 billion maturing in 2013, and $1.6 billion maturing in 2014. Bank debt maturities through 2014 include: $240 million in 2011, $3.4 billion in 2012 and $3.9 billion in 2013. At Sept. 30, 2010, Fitch calculates debt-to-EBITDA equaled 1.7x through the bank facility, 2.4x through the first lien notes, 3.5x through the second lien notes and 4.7x through the unsecured notes. Fitch believes HCA has ample room under its bank facility financial maintenance covenants. Fitch calculates that EBITDA would have to decline by about 40% from the Sept. 30, 2010 LTM level to trip the 7.75x leverage covenant. Beginning with the quarter ending March 31, 2011, the covenant level will step down by 50 bp to 7.25x. Based on Fitch's projected EBITDA and debt level, HCA is expected to maintain a solid EBITDA operating cushion even under the tightened covenant.

GUIDELINES FOR FURTHER RATING ACTIONS:

A one-notch upgrade to a 'B+' IDR would be supported by debt-to-EBITDA declining to between 4.5x and 4.0x, and a two-notch upgrade to a 'BB-' IDR would be supported by an expectation of debt leverage sustained at 4.0x or below. Reductions in debt leverage could occur through some combination of growth in EBITDA due to improved operating performance and the application of IPO proceeds and/or FCF to debt reduction. Other factors that would support an upgrade include continued progress in addressing the 2012-2013 debt maturity cliff, and sustained positive FCF generation of around $1 billion annually. A return to Stable Outlook at a 'B' IDR could be precipitated by an expectation that debt-to-EBITDA will be sustained above 5.0x over the next 12-24 months. This could be caused by some combination of a deterioration in the operating trend and continued debt funding of shareholder distributions beyond the $2 billion anticipated in 4Q'10.

DEBT ISSUE RATINGS:

HCA's recovery ratings reflect Fitch's expectation that the enterprise value of the company and recovery rates for its creditors will be maximized in a restructuring scenario (going concern) rather than liquidation. Based on LTM Sept. 30, 2010, EBITDA and employing a 40% EBITDA discount and 7.0x multiple, Fitch estimates a distressed enterprise value of $23.3 billion for HCA. The 'BB/RR1' rating for the bank facility and first lien notes reflect an expectation of 100% recovery for these lenders under a bankruptcy scenario. The 'BB-/RR2' rating reflects expectation of recovery at the high end of the 71%-91% range. The 'CCC/RR6' rating on the unsecured notes reflects expectation of 0% recovery. Hold Co.'s proposed senior notes are rated 'CC/RR6', one notch below HCA's unsecured notes rating, reflecting the structural subordination of the Hold Co. notes.

Fitch anticipates that a one-or-two notch upgrade of HCA's IDR to 'B+' or 'BB-' would result in a one-notch upgrade of the bank debt and first lien notes to 'BB+' from 'BB'. If an upgrade occurs in conjunction with first lien debt reduction - for example, as a result of applying IPO proceeds to pay down debt - the rating on the second lien notes would probably improve to on par with the first lien rating. Assuming $2.5 billion of IPO proceeds is used to pay down first lien debt, it would improve Fitch's estimated recovery for the second lien holders to 100%, implying a two-notch upgrade to 'BB+/RR1' at a 'B+' IDR. In any scenario, recovery for holders of the HCA unsecured notes and Hold Co. proposed senior notes will remain significantly prejudiced by the large amount of secured debt in the capital structure (currently 75% of debt is secured), making it likely the HCA unsecured notes will remain rated below the IDR by at least one-notch, and the Hold Co. notes by at least two-notches, reflecting the structural subordination.

Additional information is available at www.fitchratings.com.

Applicable Criteria and Related Research:

--'Corporate Rating Methodology' (Aug. 16, 2010).

Applicable Criteria and Related Research:

Corporate Rating Methodology

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=546646

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Source: Fitch Ratings