HCA paid $361 million more in interest expense than it did in the same period a year earlier.

Tuesday, 09/04/07

HCA takes steady approach to reducing debt since sale
Company avoids major asset sales but cuts its costs

By GETAHN WARD
Staff Writer


HCA Inc. hasn't made any bold moves in the nine months since it went private.

It hasn't pared down like it did after its previous leveraged buyout, in the late 1980s. It hasn't sold dozens of hospitals or spun off whole divisions.

But it has kept an eye on costs, reducing the money it spends on marketing and travel, for example, while trying to increase cash flow.

"I don't think there's really been any major surprises one way or the other," said Matt Lawson, high-yield analyst with the credit research firm KDP Investment Advisors in Montpelier, Vt. "They're performing about as you would have expected before the LBO."

HCA's $33 billion sale last November to a group of private equity firms, senior executives and company co-founder Dr. Thomas F. Frist Jr. left the Nashville hospital chain company with $28 billion of debt. In the first half of the year, HCA has said, it reduced that debt by a net of $312 million.

The debt "has required more discipline as far as cost containment, but nothing out of the ordinary," said Dean Diaz, vice president and senior credit officer with Moody's Investor Service.

"Some people would have expected more sales to pay down the debt earlier, but they said assets sales were not part of the strategy," Diaz said. "They've pretty much stuck to what they said."

Chairman and CEO Jack O. Bovender Jr. declined to comment for this story, but in a speechin Junetothe Nashville Health Care Council, he said the nation's largest private hospital chain hasn't made any moves that it wouldn't have made as a publicly traded company.

Sales may be needed

Bovender has said HCA would continue to prune its portfolio where it made sense, although the deal didn't call for selling hospitals.

But Vicki Bryan, a senior high-yield analyst with the bond research firm Gimme Credit in New York, said that without aggressive asset sales it would be difficult for HCA to continue to chip away its debt load.

"The problem with HCA is that the interest cost is so high, it's absorbing an inordinate amount of their cash flow that could be used to pay down debt," she said. "When they get through paying their interest costs and capital expenditures, it leaves very little."

When the company was previously taken private, in 1989, it quickly sold several non-core holdings, including a clinical laboratory unit, a hospital management subsidiary and HCA's 50 percent stake in an insurance business. HCA went public again in 1992.

Today, the company could easily sell several under-performing hospitals to help it reduce debt, Bryan said. "We have found a number of facilities in the portfolio (generally in the coastal Atlantic states and Florida) that appear to perform below par," she said.

HCA is selling a hospital in Miami and sold both of its hospitals in Switzerland, but spokes man Jeff Prescott said it wouldn't discuss other possible sales or acquisitions.

But unless it sells more hospitals, HCA could have trouble paying down its debt, Bryan said. The investors who took the company private in November agreed to assume $11.7 billion of existing debt and borrowed an additional $16 billion to finance the deal.

In its second quarter, HCA paid $361 million more in interest expense than it did in the same period a year earlier.

That helped cut net income by $179 millionin the three months that ended June 30.

Bad debt still an issue

Besides divesting three hospitals, HCA has focused on driving down various operating expenses.

"We're in a difficult environment for (admissions) volume, and bad debt is still an issue for the industry, but the company is very actively managing its cost structure through that difficult industry environment," said Frank Morgan, a health-care analyst at Jefferies & Co. in Nashville.

For the recent second quarter, the amount of revenues HCA sets aside to cover unpaid medical bills rose to 11.2 percent from 10.6 percent last year. Also, overall admissions to its hospitals fell 1.5 percent compared with last year's second quarter.

In the first quarter, HCA reduced spending on marketing, travel and entertainment. In a conference call, Chief Operating Officer Richard Bracken said the company was tightening the belt on outside and image advertising but was continuing its outreach to doctors, whom HCA considers a key source of referral of patients.

During the second quarter, spending on salaries and benefits fell to 39.4 cents of every dollar of revenue from 41 cents a year ago, a change that analysts said reflects either a different mix of patients or changes in staffing levels at hospitals.

Prescott, the HCA spokesman, said that while the company has sold some hospitals, it also has replaced older hospitals in Kansas City and Atlanta with new facilities. At the end of its second quarter, HCA operated 170 hospitals and 107 outpatient surgery centers, compared with 176 hospitals and 92 surgery centers a year earlier.

The sale of two hospitals this year with a third transaction pending is consistent with how HCA has operated in the past, Prescott said. And since the leveraged buyout, donations through the company's foundation have remained consistent, averaging about $7 million a year, he said.

Morgan isn't as concerned about HCA's debt, citing its
9.7 percent increase in second-quarter earnings before interest, taxes, depreciation and amortization among recent positive developments.

He sees opportunities for HCA to refinance part of the debt like it did in February in a move that was expected to save $54 million in annual interest costs on about $12.8 billion of loans used to fund its buyout in November. "Looking at debt to EBITDA, it's a levered company, but the plan is to reduce the leverage over time," Morgan said.