HCA Inc. said Thursday that it would pay interest coming due next spring on $1.5 billion of debt with more bonds to conserve cash as the Nashville-based hospital chain tries to navigate through an uncertain credit market.
On May 15, holders of HCA bonds that mature in 2016 are due $72 million in cash. Now, they are slated to get bonds instead at a higher interest rate that will be worth $6 million more.
"Given all of the dramatic turmoil in the capital markets over the last couple of months, it is the prudent thing to do right now," Jack O. Bovender Jr., HCA's chief executive said in a conference call with analysts after the company released third-quarter earnings.
"We're not in any way signaling or anticipating any significant decrease in our business next year," he said.
Sheryl Skolnick, an analyst with CRT Capital in Stamford, Conn., said that the cash HCA conserves in the short run could come in handy to fund operations and pay interest on other debts. Hospital companies face prospects of a worsening economic downturn that could send them more uninsured patients.
"When the debt and equity markets are going haywire as they've been in the last month and a half, everyone wants to stuff cash in the mattress and that's really what HCA is doing," Skolnick said.
Vicki Bryan, a senior high-yield analyst at New York bond research firm Gimme Credit, said that HCA could be trying to preserve its cash in case its ability to borrow becomes even more limited.
"That's critical because HCA relies on its ability to borrow for most of its liquidity," she said. Bryan isn't a fan of the pay-in-kind option HCA plans to use.
'Negative for investors'"This is negative for investors because it's increasing an already bloated debt load," the analyst said, adding that HCA increasing the amount of bonds outstanding dilutes the value of existing bonds.
Bryan believes that HCA hasn't done enough to reduce its debt load that stood at $28.4 billion after a leveraged buyout deal two years ago that saw the company go private. HCA has long-term debt of $27 billion, executives said in the call with analysts.
Milton Jones, HCA's chief financial officer, said the company is reviewing expenses and overhead, looking for ways to reduce discretionary spending.
Bovender said that although hospitals aren't recession-proof, they generally don't suffer as much as the retail or auto industries in a downturn. But rising unemployment can add to the ranks of the uninsured and boost uncollected bills.
Meanwhile, HCA reported third-quarter results that Skolnick said generally were flat vs. a year ago. Net income for the three months that ended on Sept. 30 declined to $86 million from $300 million in the year-ago period when HCA had a one-time gain from selling two Swiss hospitals.
Revenues rose 6.6 percent to just over $7 billion. Admission at facilities opened for at least a year rose 0.4 percent, while same-facility uninsured admissions increased 0.9 percent, the company said.
Adjusted earnings before interest, taxes, depreciation and amortization was $1.053 billion in the quarter vs. $983 million a year ago.
HCA said its provision for doubtful accounts was $819 million, or 11.7 percent of revenues, compared to $774 million, or 11.8 percent, for the 2007 quarter.
Kyle Smith, a high yield analyst with Jefferies & Co. in Short Hills, N.J., said that many companies hope to hold onto cash because of uncertainty surrounding the capital markets.
"It's a cheap and convenient way to raise more cash because they have the right to issue more bonds in the payment-in-kind scenario and they're able to hold onto the cash they have," adds Rob Shuler, managing partner of All-American Holdings, a Nashville-based private equity group. "They're incredibly fortunate (to) have that option."
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