S&P Raises Outlook on HCA Holdings (HCA) to Positive; Notes Stronger Financial Profile

Standard & Poor's Ratings Services (NYSE: HCA) revised its rating outlook on for-profit hospital operator HCA Inc. to positive from stable. At the same time, we affirmed the 'B+' corporate credit rating and all debt ratings. This action reflects the company's strengthening financial profile, which provides greater capacity for debt-financed acquisitions while maintaining debt leverage in the 4.5x to 5x range. While HCA has expanded debt capacity, the company faces considerable challenges over the next 12 to 18 months as health care reform continues to pressure the hospital industry. We believe the pace of organic growth is slowing, which could temper EBITDA improvement prospectively. Additionally, management has indicated an increased appetite for acquisitions. We could consider an upgrade once we develop deeper confidence that HCA will maintain its current debt leverage profile (4.5x to 5x debt/EBITDA) as it pursues acquisitions and weathers continued health care reform.

"HCA faces competitive threats and reimbursement/pricing pressures that are offset by its large, relatively diversified portfolio of hospitals, which help it to manage uncertain reimbursement and spread local market risk over many markets," said credit analyst Cheryl Richer. "HCA is the largest publicly traded for-profit hospital operator in the U.S. with a presence in 20 states, 42 markets, and minimal presence (six hospitals) in England. As of March 31, 2014, it operated 165 hospitals. HCA's hospitals are commonly located in midsize to larger markets and often have a strong market position."

The positive outlook reflects the potential for an upgrade within one year if HCA can maintain its current debt leverage profile as it pursues acquisitions and weathers challenges from health care reform.

Upside scenario

We could upgrade HCA within one year if we gain greater confidence that our base-case scenario will be realized, and that acquisitions are financed with a balance of internally generated cash and debt issuances. Our base-case forecast assumes the company could incur about $1.5 billion of incremental debt annually, given flat margins and about 3.5% total revenue growth and maintain debt leverage below 5x.

Downside scenario

We could revise the outlook to stable if the scale of acquisitions is more significant than anticipated and/or operating performance is weaker than anticipated such that we believe debt leverage will remain above 5x. For example, a $2 billion incremental increase in debt to our base-case assumptions for 2015, without consideration of additional EBITDA or material acquisition-related expenses, would increase debt leverage to this point. Alternatively, stagnant revenues and a 150-basis-point contraction in gross margin could cause us to change our outlook to stable.

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