HCA Holdings Inc.’s (HCA) wholly owned subsidiary, HCA Inc., has offered senior notes worth $750 million due 2025. However, neither the terms of the notes nor the interest rate were disclosed. Both will be subject to market conditions at the time of pricing.
HCA Holdings plans to use the net proceeds of the offering to repay its existing senior notes worth $750 million, which are due in 2015, at an interest of 6.375% at maturity. The balance of the funds raised will be used for general corporate purposes. HCA Inc. may initially borrow the necessary amounts under its revolving credit facilities if receipts of the proceeds of this offering are pending.
Moody's Investors Service – the credit rating wing of Moody's Corp. (MCO) – assigned a B2 (“LGD 5”) rating to the above offered senior notes.
Moreover, Moody’s does not expect this refinancing transaction to bring any change in the leverage of the company and hence HCA Holdings’ ratings of Ba3 Corporate Family Rating and Ba3-PD Probability of Default Rating as well as the stable outlook remain unchanged.
Rationale
Moody’s Ba3 Corporate Family Rating to the company indicates its expectation that the company’s dominant market strength will permit it to drive continuous revenue growth as well as support healthy EBITDA (earnings before interest, taxes, depreciation and amortization) margins.
HCA Holdings’ position as the largest for-profit hospital operator in terms of revenue facilitates its ability to leverage investments. The company thus has the required resources to better adapt to changing sector dynamics and weather industry challenges.
Moody’s expects the company to continue to return capital to its shareholders in lieu of debt repayment. Yet, the rating agency expects the company to generate abundant cash to fund its medium-sized acquisitions with little impact on the credit metrics.
With the issuance of new debt, Moody’s expects the company’s debt to EBITDA to be in the range of 4.5x–5.0x.
HCA Holdings’ ratings can witness an upgrade if the debt to EBITDA is maintained below 4 times which can be achieved if the company sees continuous earnings growth or repays debt. Moreover, Moody’s would like to see the company preserving a conservative financial profile before considering an upgrade. This includes limiting leverage increases for the purpose of shareholder distributions or share repurchases.
However, HCA Holdings’ ratings could witness a downgrade if the company’s operating trends deteriorate like for example negative trends in same-facility adjusted admissions or same-facility revenue per adjusted admission. Additionally, a debt to EBITDA above 5.0x due to additional debt incurred to fund shareholder distributions or acquisitions could also result in a downgrade.
We note that rating affirmations or upgrades from credit rating agencies play an important part in retaining investors’ confidence in the stock as well as maintaining credit worthiness in the market.
Currently, HCA Holdings holds a Zacks Rank #2 (Buy).
Other Stocks to Consider
Other stocks in the medical hospital sector holding the same Zacks Rank as HCA Holdings include MEDNAX, Inc. (MD) and Universal Health Services Inc. (UHS).
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