HCA’s Debt, Credit Ratings To Be Boosted by IPO

NEW YORK, May 10 (Reuters) – HCA Inc’s planned initial public offering is likely to be positive for the hospital operator’s credit spreads and ratings, as the company plans to use proceeds to pay down debt, though the road to investment grade will take more time.

HCA, which is backed by buyout firms Bain Capital and Kohlberg Kravis Roberts & Co (KKR.AS), on Friday filed for an initial public offering of up to $4.6 billion, the biggest buyout-backed offering since the financial crisis began nearly three years ago.

“We expect strong investor appetite for HCA’s shares given the business’s steady underlying volume trends combined with the company’s industry leading management and dominant market positions,” CreditSights analyst Sam Goodyear said in a report.

The company’s credit spreads likely face “upside risks,” meaning they are likely to outperform benchmarks, Goodyear said. “The key driver of near-term relative value for HCA’s credit will be investor appetite for exposure to the equity of a defensive industry’s leading company,” he said.

The cost to insure HCA’s debt with credit default swaps fell to 458 basis points on Monday, or $458,000 per year to insure $10 million in debt for five years, from 550 basis points on Friday, according to Markit Intraday.

The swaps had jumped from around 400 basis points at the beginning of the week, as credit markets suffered a severe sell off, before rally on Monday, Markit data show.

HCA was bought in November 2006 in a $21 billion deal by a consortium that also included Bank of America Corp, Citigroup Inc and HCA’s founder. The deal added significant debt to the company’s balance sheet and sent its ratings deeper into junk territory.

The company had $26.86 billion in debt as of March 31, up from $10.48 billion of debt at the end of 2005, before the LBO. The debt has fallen, however, from $28.41 billion at the end of 2006.

Analysts at KDP Investment Advisors calculates the company’s leverage, a measure of net debt relative to earnings before interest, taxes, depreciation and amortization, at 5.2 times at the end of the first quarter and said this measure should fall below 5 times with proceeds from the IPO.

“We expect further deleveraging and a “return-to-investment-grade” story will likely be a key part of
the pitch to prospective equity investors,” analyst Peter Thornton said in a report.

Any road to investment grade, however, may take time and will require additional debt reduction that envisaged from the IPO.

Moody’s Investors Service and Standard & Poor’s both said they may raise HCA’s ratings if the company uses proceeds to pay down debt, though the ratings would remain several steps from investment grade. Moody’s said any upgrade would likely be limited to one notch above the current rating of B2, five steps below investment grade. S&P said it may raise the company one notch from B-plus, four steps below investment grade.

“The speculative-grade rating on HCA continues to reflect our view that the largest U.S. owner and operator of acute health care facilities is particularly sensitive to reduced capacity utilization and pricing,” S&P said in a statement.

KDP, meanwhile, upgraded its recommendation on HCA’s 9.25 percent second priority senior secured bonds due 2016 to buy, from hold, and reiterated a buy recommendation on the company’s 5.75 percent bonds due 2014.

“The consistent cash flow generating ability of the company, even during the financial crisis, certainly provides a strong measure of credence to the perception that healthcare is a solid defensive sector for debt and equity investors,” KDP’s Thornton said.

By Karen Brettell (Editing by James Dalgleish)