HCA Holdings (HCA) Corp. Credit Rating Raised to 'BB' by S&P

Standard & Poor's Ratings Services today raised its corporate credit rating on Nashville-based acute care hospital operator HCA Inc. (NYSE: HCA) to 'BB' from 'B+'. The rating outlook is stable.

At the same time, we assigned our 'B+' issue-level rating and '6' recovery rating to HCA's proposed $750 million issue of senior unsecured notes due 2025. The '6' recovery rating on this debt is the same as the recovery rating on HCA's existing unsecured debt.

We also raised our ratings on HCA's existing senior secured debt and senior unsecured debt to reflect the corporate credit rating upgrade. We raised the rating on company's senior secured debt 'BBB-' from 'BB', reflecting the raised corporate credit rating. The recovery rating on this debt remains '1', reflecting our expectation for very high (90% to 100%) recovery in the event of default. In addition, we raised the rating on HCA's existing senior unsecured debt to 'B+' from 'B-', which also reflects the corporate credit rating upgrade. The recovery rating on this debt remains '6', reflecting our expectation for negligible (0% to 10%) recovery in the event of default.

"The two-notch upgrade to our corporate credit rating on HCA reflects the company's significant outperformance this year relative to our base-case forecasts," said Standard & Poor's credit analyst Shannan Murphy. It also incorporates our assessment that the company's business risk profile has improved, reflecting our belief that HCA's scale and diversified business mix provide a competitive advantage in negotiating contracts and managing reimbursement uncertainty over time. While we believe HCA and its peers will experience increased margin pressure due to slower reimbursement growth, we expect HCA to be better able to offset these pressures given its scale and business diversity, resulting in less earnings and cash flow volatility relative to peers. At the same time, our rating action incorporates our increased confidence that HCA will be able to pursue its growth objectives while maintaining leverage below 5x, in part due to higher-than-expected EBITDA growth over the past few quarters.

Our stable outlook reflects our expectation that HCA's financial policies will remain shareholder friendly, but that EBITDA expansion over the past few quarters should allow the company to pursue its return objectives while maintaining leverage below 5x over time.

We could lower the rating in the unlikely event that EBITDA margins contract by about 450 basis points, to around 14.5%. For this to occur, we believe there would need to be a significant negative shift in reimbursement rates. We could also lower the rating if the company becomes significantly more aggressive in its growth objectives, pursuing debt-financed share buybacks or acquisitions that result in leverage sustained above 5x for an extended period of time. Assuming no acquired EBITDA, we estimate that there is around $9 billion of debt capacity at the current rating.

We could raise the rating if HCA adopts more conservative financial policies, highlighted by a commitment to sustain debt to EBITDA around 3.5x over time. While we believe that HCA could achieve these metrics over the next year by prepaying about $3 billion of debt, we believe that the company is likely to use some of the debt capacity created by an increase in EBITDA to reward shareholders and to grow its market position in a consolidating industry.

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