HCA To Sell $1,5bn of Junk Bonds To Pay Shareholders Dividend

Hospital operator HCA Inc. says Tuesday it plans to sell $1.525 billion of junk bonds and put proceeds toward a $2 billion dividend payment to its private-equity owners. The offering of senior unsecured notes due 2021 is being handled by joint bookrunners Citigroup, Bank of America Merrill Lynch, J.P. Morgan Chase & Co, Barclays PLC, Credit Suisse Group, Deutsche Bank AG, Goldman Sachs Group, Morgan Stanley and Wells Fargo & Co.

“They’ve wiped out all the debt repayment that they’ve accomplished in two years and they’ve wiped out their cash flow.”

Vicki Bryan

Who? Me?

Price guidance is in the area of 7.75%, according to a person familiar with the deal, and books close at end of business Tuesday, with pricing expected Wednesday morning, Dow Jones Newswire reports.

Hospital Corporation of America (HCA) says its third-quarter profit rose 24% to $243 million from $196 million a year earlier, while revenue increased 1.5% to $7.6 billion as its bad-debt provisions fell 21%.

Moody’s Investors Service assigned a Caa1 rating to the bonds, deep in speculative-grade, or junk, territory, but confirmed its existing corporate ratings for HCA at B2 and revised its ratings outlook to positive. Moody’s says that HCA is adding incremental debt but has been able to offset industry pressures, such as increasing bad-debt expense and weak volumes, and realize solid earnings growth.

But Vicki Bryan, analyst at bond research firm Gimme Credit, says the improvements in uncompensated care and bad-debt provisions are due to changes in HCA’s accounting methodology–changes that the company will no longer benefit from next year.

Bryan also noted that it was the third dividend HCA will pay to its owners this year, following a $1.75 billion dividend in February and a $500 million dividend in May.

“They’ve taken $4.25 billion in dividends in a year at the expense of bondholders,” Bryan says.

“They’ve wiped out all the debt repayment that they’ve accomplished in two years and they’ve wiped out their cash flow.”

An HCA spokesman didn’t immediately return a phone call seeking comment.

HCA was taken private in 2006 in a $31 billion leveraged buyout by a private-equity consortium led by Bain Capital, Kohlberg Kravis & Roberts, Merrill Lynch, and Thomas Frist Jr., HCA’s co-founder.

The new notes will be sold through a newly minted parent company, HCA Holdings Inc. That company had been created recently as a subsidiary but will be converted into a parent company as part of a proposed corporate reorganization.

Moody’s credit analysts described the bond offering as covenant-lite, meaning it lacks certain customary bondholders protections that prevent the company from making restricted payments or incurring additional debt.

Since its LBO, HCA has taken periodic steps to refinance portions of its resulting debt burden, including selling $1.4 billion of bonds in March to pay down bank debt while pushing out the maturity on another $2 billion of bank debt to 2017 from 2013. The notes it sold then, which were secured bonds, also came with a 10.5-year maturity and yielded 7.375%.

HCA filed IPO plans earlier this year, projecting the sale of up to an estimated $4.6 billion of stock.

The large offering from HCA was one of several junk bond deals expected Tuesday, but secondary market prices didn’t weaken in the face of a deluge of supply, Dow Jones Newswire writes.

“In high yield, when you see a $1.5 billion new dividend deal, you think you’d see some pushback,” says Scott Grzankowski, analyst at KDP Investment Advisors. “But even though equities are down, overall the high yield market is firm.”

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