IPO on Hold, HCA Owners Pile More Debt on Hospital Chain
What a difference eight months has made for HCA, the giant for-profit hospital chain. Last spring, having borrowed $2.25 billion to pay themselves dividends from HCA, the private investors who own the firm were planning an initial public offering that was expected to bring in up to $4.6 billion, partly because of healthcare reform's promise to increase coverage. That would have paid down HCA's debt and given the investors yet another payday.
But with market interest in IPOs tepid, HCA's owners are instead taking on more debt to increase their own profits. The question is whether their greed -- coupled with some operational issues -- will eventually torpedo the chain.
Besides members of the Frist family, which founded HCA, the company's owners include Kohlberg Kravis Roberts & Co., Bain Capital Partners and Bank of America. That bank, of course, now owns the Merrill Lynch private equity firm that participated in the $33 billion leveraged buyout of HCA in 2006.
The IPO has been put on indefinite hold, but HCA's debt continues to escalate because of the hot market for corporate bonds, according to Bloomberg. Like many other firms, KKR/Bain/BoA are exploiting the large disparity between the yields of U.S. Treasury bonds and the currently high yields of corporate debt, which average 8 percent. This makes it easier to sell bonds and pay investors a dividend than to launch an IPO.
Of course, the debt is being paid down out of HCA's enormous cash flow. But Bloomberg notes that HCA owed $26.1 billion at the end of the third quarter, $400 million more than it did a year earlier. The ratio of debt to cash flow was 4.9, compared to 6.4 at the time of the leveraged buyout. But HCA had to sell assets and reduce capital investment to lower its indebtedness. Now the ratio of debt to cash flow will rise again.
Meanwhile, HCA, like other hospital chains and healthcare systems, is facing labor unrest as well. Last-minute intervention by a federal mediator averted a one-day strike last week by members of the SEIU-UHW union against HCA's five hospitals in California. The threat to strike followed a year of fruitless negotiations with HCA in which SEIU-UHW tried to get HCA to improve staffing levels and give the 2,700 union members at its hospitals a raise. (These workers include licensed vocational nurses, certified nursing assistants, respiratory therapists, x-ray technicians, and housekeeping staff.) The two sides have now reached agreement on a new contract.
Reading the union's press release about the understaffing of many HCA hospital units, it's hard to believe this is unrelated to the buyout firms' depredations on the chain's cash flow.
On the opposite of the country, nurses at three central Florida HCA hospitals voted in November to join the National Nurses Organizing Committee-Florida, an affiliate of National Nurses United (NNU). That union, which represents nearly 160,000 nurses across the country, helped organize a one-day walkout of nurses at 14 Minnesota hospitals last June. The Florida vote is significant partly because less than 10 percent of Florida nurses are unionized. (Nationally, about 20 percent are.)
Whether or not HCA has to cope with additional strikes, the company has a less upbeat outlook today than it did last April. The more debt it takes on, the less ability it will have to run its hospitals properly and keep its employees happy. Eventually, it may no longer be able to invest even in necessary capital improvements. But by then, KKR, Bain and BoA may be long gone.
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