Hospital Corporation Of Americ Hca's Capital Structure

Executive Summary
Statement of Problem
Hospital Corporation of America (HCA) is a proprietary hospital management company that owns and manages chains of hospitals on a for-profit basis. HCA is currently facing a complex financial situation with their ratio of debt to total capital approaching 70%, as opposed to a target ratio of 60%. While some investors welcome HCA’s more aggressive use of leverage, others are worried that HCA’s capital structure could decrease the company’s current A bond rating. As a result of increased debt, a decline in HCA’s first-quarter earnings per share could occur. The company faces the problem of deciding what should be done to its capital structure and whether reducing the ratio of debt to total capital to match the target ratio would lead to improved performance.

Discussion
The issue that needs to be addressed is the target capital structure of HCA.
An important goal of HCA was to maintain a 60% target ratio of debt to total capital for the leverage expectation of an A bond rating. However, at its current state, HCA has a ratio of debt to total capital at 68.8%, which will reduce the firm’s A bond rate. This higher ratio of debt to total capital shows investors that HCA is more prone to using debt financing and shows weak financial strength with the possibility of increased default risk. By reducing the ratio of debt to total capital to 60%, the company is able to maintain itself as an A-rated hospital management company. The new debt value would be $1152 million as opposed to the current $1692 million. HCA will also be able to reach the targeted goals of growth of 13% and ROE of 17%. The predicted growth rate and ROE at $1152 million debt is 14% and 17%
respectively.

A portion of the growth of HCA has been achieved through acquisitions of other proprietary hospital management companies such as Hospital Affiliates International (HAI), the nation’s fifth-largest hospital management chain. External financing of HCA mainly involves the use of revolving bank credits to fund hospitals under construction. The bond rating of HCA is very important and plays a large role in the growth of HCA because it allows debt financing on acquisitions which result in large portions of the revenues and earnings of HCA. Even after growth by acquisition subsides, high occupancy rates will continue to generate revenues, thus ensuring future growth. The loss of an A bond rating would make access to debt markets more difficult for HCA which is a direct correspondence of new acquisitions.

Recommendation

HCA should lower its ratio of debt to total capital to 60% to maintain an A bond rating. This involves HCA returning to a 60-40 capital structure. With a capital structure of 60%, HCA is still able to reach target goals of growth at 13% and ROE at 17%. This will ensure continued growth in revenues and earnings through acquisitions of nonprofit hospitals. Future growth can be expected as well because of increased occupancy rates and additional services from the additional acquisitions, which translates directly into higher earnings.