Fitch Rates HCA's Secured Bank Term Loan 'BB+'

Fitch Ratings has assigned a 'BB+' rating to HCA Inc.'s (HCA) $1.0 billion senior secured bank term loan. Fitch expects that the company will apply the proceeds of this term loan to refinance certain existing term loans of HCA Inc. The Rating Outlook is Stable. The ratings apply to $29.4 billion of debt outstanding at March 31, 2015. A full list of ratings follows at the end of this release.

KEY RATING DRIVERS

Hospital 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 FCF (operating cash flows less capital expenditures and distributions to minority interests).

Transition to Public Ownership: 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 new independent members to the 11-member board of directors (BOD), bringing the total to seven.

Shifting Priorities for Cash Deployment: Under the direction of the LBO sponsors, HCA's ratings were constrained by shareholder-friendly capital deployment; the company has funded $7.4 billion in special dividends and several large repurchases of the sponsors' shares since 2010. Fitch Ratings thinks that HCA will have a more consistent and predictable approach to funding shareholder payouts under public ownership and an independent BOD.

Expect Nominal Deleveraging: Fitch forecasts that HCA will produce discretionary FCF (operating cash flows less capital expenditures and distributions to minority interests) of about $1.6 billion in 2015, 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.

Liquidity Profile is Solid: At March 31, 2015, HCA's liquidity included $586 million of cash on hand, $2.6 billion of available capacity on its bank facility revolving loans and LTM discretionary FCF of about $2.3 billion. HCA's EBITDA/gross interest expense is solid for the 'BB-' rating category at 4.4x and the company has ample operating cushion under its bank facility financial maintenance covenants, which require debt net of cash not to exceed 6.75x EBITDA.

Debt Maturities are Manageable: Fitch believes that HCA's favorable operating outlook and financial flexibility afford the company good market access to refinance upcoming maturities. Large upcoming maturities include $1 billion of HCA Inc. unsecured notes and $1.23 billion of bank term loans maturing in 2016. Proceeds of the proposed term loan issuance will be used to refinance a portion of the 2016 term loan maturities.

RATING SENSITIVITIES

If HCA consistently operates with leverage below 4.0x over the next several quarters, it could support an upgrade of the IDR to 'BB'. In addition to a commitment to operate with lower leverage, sustained improvement in organic operating trends in the hospital industry would support a higher rating for HCA. Fitch believes the hospital industry may post another couple of quarters of above-trend growth in patient volumes as the positive effects of the Affordable Care Act gain momentum in 2015. However, secular headwinds to growth remain intact over the longer term.

Maintenance of the 'BB-' Issuer Default Rating (IDR) considers HCA operating with total debt/EBITDA below 4.5x, and with an FCF margin of 4% or higher. A downgrade of the IDR to 'B+' is unlikely in the near term, since these targets afford HCA with significant financial flexibility to increase capital investment and acquisitions while still applying some cash to share repurchases.

KEY ASSUMPTIONS

Very strong rates of organic volume growth in the first half of 2015, supported by ramp up of ACA related benefit and improving economic conditions, tapering to a more normalized 2-3% later in the year

Modest EBITDA margin compression in later 2015-2016 primarily resulting from negative operating leverage as volume growth rates normalize and pricing trends remain stable

EBITDA of $7.8 billion and discretionary FCF of $1.6 billion in 2015 with higher capital expenditures of about $2.5 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 all debt coming due is refinanced; resulting in gross debt/EBITDA of 3.5x - 4.0x through the forecast period.

DEBT ISSUE RATINGS

Fitch currently rates HCA as follows:

HCA, Inc.

--IDR 'BB-';

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

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

--Senior unsecured notes 'BB-'.

HCA Holdings Inc.

--IDR 'BB-';

--Senior unsecured notes 'B'.

Total debt of approximately $29.4 billion at March 31, 2015 includes $8.1 billion of first-lien secured bank debt, $11.1 billion of first-lien secured notes, $7.1 billion of HCA Inc. unsecured notes, and $2.5 billion of Hold Co. unsecured notes. HCA's bank debt comprises approximately $5.5 billion in term loans maturing through May 2018; a $2.0 billion capacity cash flow revolving loan and a $3.25 billion capacity asset-based revolving loan (ABL facility). Earlier in May, HCA Inc. issued $1.6 billion of senior unsecured notes and intends to use the proceeds to retire a portion of the Hold Co notes.

The secured debt rating is two notches 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.

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 about 2.5x. Fitch often notches ratings on unsecured debt obligations below the IDR level when secured debt leverage is greater than 2.5x. The strength and stability of HCA's cash flows supports an expectation of at least average recovery for these lenders relative to historical rates in an event of default, supporting a rating at the same level as the IDR. However, 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 'B+'.

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.

Date of Relevant Committee: August 13, 2014

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'High-Yield Healthcare Checkup' (April 30, 2015);

--'Hospitals Credit Diagnosis: Operating Performance Strength to Persist in Early 2015' (April 14, 2015);

--'For-Profit Hospital Insights: Fitch's Annual Review of Bad Debt Accounting Policies and Practices' (Jan. 7, 2015);

--'U.S. Leveraged Finance Spotlight Series: HCA Holdings, Inc.' (Dec. 9, 2014);

--'2015 Outlook: U.S. Healthcare' (Dec. 4, 2014);

--'Corporate Rating Methodology' (May 28, 2014).

Applicable Criteria and Related Research:

High-Yield Healthcare Checkup: Comprehensive Analysis of High-Yield U.S. Healthcare Companies

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=865268

Hospitals' Credit Diagnosis (Operating Performance Strength to Persist in Early 2015)

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=864547

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=681330

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=845870

U.S. Leveraged Finance Spotlight Series - HCA Holdings, Inc.

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=818408

2015 Outlook: U.S. Healthcare (The Value Debate Intensifies While Aggressive M&A Continues)

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=824368

Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749393

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=985273

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

View source version on businesswire.com: http://www.businesswire.com/news/home/20150522005802/en/